Emotion And Devotion Have No Place In Investing

Includes: PDLI
by: Roger Nusbaum

A couple of days ago I stumbled across a very interesting stock - PDL Biopharma (PDLI). I remember this name from quite a few years ago getting highly touted by someone and while I don't recall the specifics from back then I remember being compelled (never bought). The company has since gone through some sort of transformation (anyone knowing the details please comment). During the worst of the financial crisis it fell 76% per Google Finance but that may not be accounting for a one time dividend of $4.25 in 2008.

Since the March 2009 low the stock is up 15% but in 2009 it skyrocketed up, then came back down but that may not be accounting for another one time dividend of $1.67 in 2009. For the last couple of years it has had very little volatility, has been very cheap statistically and has a very high yield of 8.8%. Basically the company gets royalty payments for the use of its technology with the big money maker being the Queen et al patent portfolio.

The catch here is that the patents start to expire slowly in 2013 with an expiration cliff coming in late 2014. There will be continued revenue to some degree after the expirations but the fortunes of the company look like they will change meaningfully after the expiration cliff.

I saw the name and the yield somewhere so the first thing I did was look at it on Yahoo Finance to understand the basic numbers - this is backward looking but there is nothing wrong with understanding where a stock has come from just make sure you look forward before you buy. The second thing I did was look to see if there were any articles on Seeking Alpha about it and there were a couple of recent ones including this one from someone named Paulo Santos.

Just a quick side note here, you do need to be very careful with SA articles but I found a couple that outlined the bullish argument and in the comments some folks mentioned the bear case. Knowing nothing about the name I got a sense of both sides to then further research if I was so inclined.

The Santos article went into great detail on the bear case including a slide from the company detailing what needs to happen for the company to do well past the expiration cliff. It did not take much time for me to decide I'll pass for the simple reason the end is a very tangible thing in just two and half years. It could remain viable after that time but the catalyst for the end is too soon and too simple for me to be comfortable. If the company is going to expire with the patent portfolio I would expect the stock to start pricing that in much sooner than 30 months from now - the market is forward looking after all.

As one comment from one of the articles reminded, it has an almost 9% yield for a reason. A point I have made before is that a, in this case, 9% yield in a 0% world is telling you there is a risk regardless of whether you can figure out what the risk is. In this case you can figure out the risk - the money maker may stop making money in 30 months.

Actually though the point of this post is not about whether to buy the stock or not but about the devotion to the stock in the comments on Santos' article. On last look there were 57 comments and the thread was probably one of the most entertaining I've ever read. Some comments defending PDLI expressed a belief that the company is doing what it needs to seek new revenue sources and get more life out of the expiring patents and maybe that is true and maybe the company will be alright.

Some of the other comments defending the stock were from people very content to collect the dividend for the next two and half years and then get out. In these comments there seemed to be no mention, so I assume no understanding, that if the company cannot mitigate the threat from the expiration the stock will start pricing in its demise long before the actual cliff arrives. Santos was very engaged in the conversation and I believe it would be correct to say that many of his answers boiled down to "did you look at the slide in the article and do you realize it is from the company?"

This one is easy in that both sides are easily articulated and anyone with any interest can decide on an easily framed debate. The important takeaway is the apparent emotion and devotion to the stock. Read the comments and decide for yourself about emotion and devotion but that is what I think I am reading and I would caution about too much of either in analyzing the merits of a stock.

A given stock either turns out to be a good hold or a bad hold or maybe it starts out well and something changes but owning a stock requires understanding what a company is and where it has come from and then being able to objectively monitor the future prospects and any changes in the future prospects. This becomes more difficult when a strong emotional attachment is formed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.