logicalthought's  Instablog

news.yahoo.com/s/ap/20091117/ap_on_he_me...

Here's my back-of-the-envelope analysis, derived from stats I culled from various web sites:

Approximately 3.5 million U.S. patients are on Plavix and approximately 65% of them are also prescribed a PPI. Meanwhile, 8.7 million Americans are on PPIs. So if 65% of those on Plavix stop taking PPIs, 2.3 million patients out of 8.7 million would be lost, which would be 26%. However, SNTS's drug is actually gaining market share, so let's say it's a 20% haircut to SNTS's Zegerid (its branded PPI) sales. SNTS's drug is doing around $125 million/year, so this could be a $25 million revenue hit. As I'm valuing the company at 2x revenue + cash, I could see this as a hit to the stock price of just under $1/share. (SNTS's total run-rate revenue is around $150 million including all products. Also, there are lots of other crosswinds here, though, as competing-- although not as fast-acting-- PPIs go OTC soon, and they will probably steal some share from prescription Zegerid, but on the other hand, Schering Plough is licensed to market its own version of OTC Zegerid assuming it gets FDA approval in December, and SNTS will get a 10% royalty on that, and I think that will eventually be a $150 million drug.)

Net-net, my inclination is to reduce my current valuation of this company (assuming it wins its lawsuit) from the mid-$6s to the mid-$5s, so considering the lawsuit risk, I'm inclined to buy this back somewhere lower in the $3s, but not up here at around $4.

Hey, I could be wrong and the stock could go to $7 by February, but this is my thought process and please feel free to disagree.

As an aside, I've been continually adding to my DUSA, and it's now around a 17% position for me.

I put 10% of my accounts (I run concentrated positions-- sometimes as much as 30% in a single company) into a little company called DUSA (that's both the name and the ticker), at prices ranging from $1.44 to $1.60. It's a dermatological drug/device company that just put out a stellar quarterly report, growing revs 21% year-over-year (who does THAT in this environment except, perhaps for bankruptcy attorneys?), and although it lost .02/share on $6.9 million in revenue, management made it clear on the conference call that it expects the company to be profitable beginning in the current quarter and for all of 2010. I think that the right way to value this company is to put a 2x multiple on annualized run-rate revs of just under $28 million (which equals approximately $56 million), then add in the $15 million of cash, for a total EV of $71 million. With 24.1 million shares outstanding, this equal a fair value of around $2.95/share. The biggest caveat I can put on this is that I hate the overall market, and good companies that are cheap can become even cheaper if the whole market slides. On the other hand, the fact that these guys were able to grow the top line so substantially in the current environment is rare and compelling, and even a bear market can love a good growth story, as there tend to be so damn few of them in the kind of economic environment that "breeds the bear".

Goodyear tire announced today that it's raising prices by 6% to account for higher raw material costs. Clearly, this is an early shot across the bow from the sliding dollar and, I think, a sign of a particularly ugly form of stagflation, whereby the cost of products go up but-- due to the large "overcapacity" in available workers-- there are no corresponding wage increases to help pay for them. (See the article in today's Wall Street Journal about the 40% pay cuts folks are taking if they can find new jobs after losing their previous ones.) In this emerging environment, I wouldn't own a consumer discretionary stock if my life depended on it.

No positions in companies mentioned.

Lots of folks (myself included) have been commenting frequently about the fact that since April, this market has been going up on very light volume relative to its volume on down-days (and relative to the volume for the many months leading to the lows of March). Therefore, from a technical perspective it seems to make this move extremely "suspect".

However, in fairness, I'd like to point out that most of the climb from 2003 to 2007 took place at much lower volume levels than even the "light" levels of today. (I'm using SPY volume as a proxy for overall market volume, as I believe it's pretty accurate.) Take a look at a five-year daily SPY chart and see how many 40, 50, 60 and 70 million-share days there were then, vs. the "light" days of today of 140, 150 or 160 million shares. Perhaps this is distorted by more computer trading these days, but I'm sure there was plenty of computer trading then, too-- after all, we're just going back three, four and five years, not 30, 40 or 50. So, this is one caveat I want to throw out there for anyone (myself included) who's looking for a technical-- rather than a fundamental or news-driven-- reason for this rally to end.

Long SDS

...stocks are going to flip very quickly from liking a lower dollar to hating it. The G-20 made it quite clear over the weekend that it wants a lower dollar. Why-- hearing that-- would a foreign owner of U.S. stocks or bonds be willing to buy any more? I think we're about to see a massive spike in Treasury yields which will kill equities from multiple directions at once by spiking mortgage rates, compressing equity PE ratios and raising corporate America's borrowing cost. The last few days' move up in the equity markets has been on increasingly less volume (including the pre-market volume today), and I don't think it's sustainable. I'm currently approximately 25% in SKF (the financials have been a real lagger here), 25% in SDS and 20% long SNTS (which, frankly, has been saving my portfolio's ass over the past few days). What would get me to sell off some SDS or SKF? An increase in volume for this up-move.

The volume on today's bounce was awful, and I think it was a great way to completely work off the short-term oversold situation that was in place from the action over the past week or so. Despite the spin on CNBC, retail sales data was pretty bad-- barely a slight nudge up over a year ago, when everything in the economic universe had pretty much shut down completely. This is all consistent with the "L-shaped" scenario; i.e., that even if we've stopped going down (and whatever stabilization there is has just been due to government spending, anyway), it's going to be a very long time before we can start going back up, and thus I see major PE multiple contraction ahead for stocks. I re-added a lot of SDS today at $38.95 and $39.20, and am now around 37% in SDS, 23% in SKF and 20% long in SNTS. (I had to trim back a little SNTS during today's huge pop in order to maintain a constant 20% position there.)