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Download the latest IWY newsletter (July 2018)
Vol. 23, No. 3July 8, 2018

Review of Second Quarter of 2018

Two forces were having a tug-war against the US stock market this quarter: the US economy and President Trump. The US economy continued to do well, reflected in the GDP growth rate rising, unemployment rate decreasing, and average labor salary increasing. However, President Trump countered the good economic news with a series of trade wars against China and many of our allies. The result is a confused market: the Dow went up 1% NASDAQ went up 7% for the quarter and therefore, the Dow went down 2% for the year and the NASDAQ went up 9% for the year. Our composite portfolio did better than both and finished the quarter gaining 26% year to date, way ahead of either index. We had several extraordinary gains for the quarter: CHK went up 56%; AMD went up 48%; and SGEN went up 26%. Our top ten holdings at the end of the quarter, in order, are AMD, DVAX, BRK, IMGN, CHK, MU, PONAX, SGEN, INFN, and IBB (iShare Nasdaq Biotech ETF). During the quarter, I added shares of AGEN, ATRS, DVAX, and IMGN and sold or donated shares of AMD, CHK, PACB, SGEN, and TRREX.

Noticeable News/Events with Our Top Ten Stocks and Recent Picks in the Past Quarter

AMD: The share price of AMD skyrocketed in the second quarter, gaining 48% to close at $14.99. The Street now is convinced that AMD's CPU has taken significant market shares back from Intel. My belief is that AMD has indeed developed a superior CPU product line that is cheaper and better than Intel's. AMD is able to partner with Taiwan Semiconductor (TSM) to produce chips in 7 and/or 8 nm wafers while Intel is still producing them in 11 nm wafers. This advantage may give AMD an upper hand for years to come. I am therefore revising my target price up from $15 to $20. If AMD can significantly improve its profit margin in the next year, it may command an even better share price.

DVAX: The share price of DVAX dropped 23% to $15.25 at the end of quarter largely due to less than stellar news from DVAX's cancer drug trials. On May 16th, DVAX reported that the new Phase II data on 25 patients on SD101 and Merck's Keytruda has a 60% response rate, which was much less than the 100% response rate from Phase I trials reported back in 2017 on 7 patients. I believe that the new data, although less impressive, is within reasonable expectations at this stage.

IMGN: Share prices of IMGN fluctuated around $10 and $11 finishing the quarter at $9.73. During the quarter, IMGN successfully raised more than $200 million in a secondary public offering at $11/share. This gives IMGN an additional two years' worth of capital for new drug R&D. While the stock dilution stymied the stock price increase, the additional cash will help IMGN in the long term for new drug development.

CHK: I recommended CHK in October 2017 when it was $4.30/share. CHK finally rewarded patient IWY friends who bought the stock last year; watched the share price continued to drop to as low as $2.53 in February this year; and hopefully averaged down as I did. CHK went up more than 50% this quarter and closed the quarter at $5.24. CHK is now our 5th largest holding. My target price remains $20.

MU: The price of MU continued to rise in the second quarter of 2018, reaching over $64 before settling back to close the quarter at $52.44.

Stock Picks of the Quarter

Our stock-picks this quarter are all based in San Francisco Bay Area. They are Box (BOX on NYSE), Dropbox (DBX on NASDAQ) and Exelixis Pharmaceuticals, Inc. (EXEL on NASDAQ).

Let's first discuss the BOX and DBX pair. Angie and I co-wrote this part of the picks.

BoxDropbox

These days, it seems like nearly every major service we sign up for comes with cloud storage options: email, photo sharing, a new smartphone. With advancements in wireless download speeds, it's become more feasible to have all of your digital footprint out there somewhere on the Internet, hopefully with some decent security at the gates. There's a lot of competition out there with huge market potential, projected to grow to $88 billion by 2022.

We're focusing on two cloud storage heavy hitters, Dropbox and Box. Founded in 2005 in Redwood City and 2007 in San Francisco respectively, BOX and DBX are in the business of online file storage and sharing. Through various applications, their users can share and edit contents; tag other users; assign tasks with due dates; embed and comment on files in real time; access files without taking up storage space on their local hard drives; and present their work to clients and business partners through a Webpage. Box IPO'd in January 2015. Dropbox had a more recent IPO this past March. Neither one is profitable yet but both are projecting small profits next year.

Despite the similarity in names, BOX and DBX have tackled the market from different ends - large companies and individuals. In our personal use and amongst our colleagues, the general sense of differences between two services is that DBX is preferred for personal use and small businesses, while BOX is preferred for enterprise use with more security features for big corporations. This is represented in the companies' beginning business models and client bases. Acknowledging their semi-blindspot, DBX has shifted focus to develop its business and enterprise platforms with the advantage of more cash on hand than BOX to support future growth. However, there is also the possibility that both companies will continue to grow and generate revenue from different corners of the market without a lot of direct head-to-head competition. Regardless of market sectors, BOX and DBX's combined revenue barely skim the top of the estimated size of the current cloud file-sharing market. When it comes to decide on which one to recommend, Angie favors BOX and I like DBX better. Either way, it's a good time to get in on the ground floor of this established and rapidly growing industry.

BOX closed at $25.86 on June 29, 2018. I have assigned BOX a value rating of 2 (out of 5 with 1 being of the best value) and a risk rating of 3 (out of 5 with 1 being the least risky). DBX closed at $32.42 on June 29, 2018. I have assigned DBX a value rating of 2 (out of 5 with 1 being of the best value) and a risk rating of 3 (out of 5 with 1 being the least risky).

ExelixisBased in South San Francisco, Exelixis, Inc. is a biotechnology company focused on developing and selling cancer drugs. The company's products include CABOMETYX tablets for treating advanced renal cell carcinoma, COMETRIQ capsules for treating progressive and metastatic medullary thyroid cancer, and COTELLIC tablets for treating melanoma. EXEL was founded in 1994. Its first drug, COMETRIQ (cabozantinib, a monoclonoantibody-based drug), was approved in 2012. EXEL had its first stock price crisis in 2014 when cabozanitinib failed a Phase III trial in treating prostate cancer; and the company had to lay off 70% of its employees. However, the company came back to win more new drug approvals and new indications for existing drugs. Among their FDA approved drugs, CABOMETYX has been an absolute star for EXEL, generating most of the company's revenue. With anticipated label expansion, it will be on track to generate more than $1 billion per year around 2021. In addition to these three commercialized drugs, EXEL has a healthy pipeline for future growth. Some of its important statistics are:

  • Market Capitalization: $6.3 Billion
  • Current P/E 26 and forward P/E 19
  • Annual Revenue $584 Million
  • Annual Profit: $253 Million
  • Cash On Hand: $427 Million
  • Debt: $0
  • Expected Annual Earning Growth Rate for Next 5 Years: 35%

Typically profitable growing companies with more than 30% annual growth rate have P/E much higher than 30. Many of the biotechnology stocks have high market capitalization even when they are not profitable. EXEL is a growth company with a value stock price, a rare gem in the biotech industry!

EXEL closed at $21.20 on June 29, 2018. I have assigned EXEL a value rating of 1 (out of 5 with 1 being of the best value) and a risk rating of 2 (out of 5 with 1 being the least risky).

Disclaimers and Your Promise

IWY newsletters are provided to my friends as investment suggestions without charge. I usually own many stocks recommended (You need to decide whether that constitutes a conflict of interest or a vote of confidence). I usually have done due diligence studies on the stocks before recommending them. However, there is no guarantee that their prices will go up either on their own or by my recommendation. If you profited from my investment advice, you have promised to use part of the profit for charities or worthy causes of your own choice.