>Personally, I would subtract Gelsolin from the list: Biogen has been pretty silent on that one. That would be icing if it came through.
>Secondly, I would put VLA4 on the list for Asthma (with Merck) and MS.
>Also, I think the sales estimate for Avonex in 2003 looks low based on current trends.
glad you like it, harold! <vbg>
actually, i do appreciate your perspective and candor.
you're gonna love this hype.
-chris.
off-topic postwords: is BC-boy-done-good flutie worth all that moola?
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Daily Screen
March 25, 1999
Playing the Index Effect
SmartMoney
By Stacey L. Bradford
INDEX EFFECT
THERE ARE many reasons why a stock might go up. But one sure-fire way for its price to rise is if the folks at Standard & Poor's pick it for inclusion in the S&P 500 index.
Blame it on the stunning popularity of stock-index mutual funds, which now control an estimated $625 billion of investors' capital. By charter, index-fund managers must buy a stock once it has been added to the S&P so that their fund's performance will match that of the index. As the new money pours in, the novitiate stocks can't help but go up.
The trick is finding out which stocks will be added to the index before the announcement is made. With that in mind, PaineWebber strategist Ed Kerschner -- our No. 2-ranked pundit -- has assembled a list of 12 companies that he believes are strong candidates to be included in the S&P. And for today's screen, we whittled the list down one step further: After doing some reporting, we isolated three companies that are dominant players in their industries and therefore might outperform the S&P even after they receive their initial kick -- Biogen (BGEN), Lexmark International (LXK) and Best Buy (BBY). (For Kerschner's full list and more about his methodology, see our screen and recipe pages.)
screen: smartmoney.com
recipe: smartmoney.com
This extra sifting is important because the "index effect" can be very short term. On the one hand, there are stocks like America Online (AOL), which made its entrance into the S&P's exclusive club last December. Its shares jumped 12% after the initial announcement was made and haven't looked back. More typical, however, are those stocks that underperform after the initial boost.
Kerschner explains that the 35 stocks that were added to the S&P 500 in 1998 appreciated on average 9.2% during the first six days of index membership. But after that, they underperformed the S&P 500 by 27% on an annualized basis. "A 9.2% gain in approximately one week is certainly an impressive return," Kerschner says. "But this was one gain you had to take quickly."
There have been some notable exceptions in the past. Back in 1996, for instance, three of the stocks that were added to the S&P 500 continued to perform exceptionally well. Dell (DELL), Guidant (GDT) and EMC (EMC) all blew the index away and Kerschner believes that's because they were dominant players in their sectors. "At the time of their entrance into the index, all three firms were 'little gorillas' that dominated niche markets," he says. "Dell owned over 50% of the direct PC vending market, EMC supplied one-third of the world's mainframe disk-storage systems and Guidant controlled about half of the cardiac rhythm management market."
Of the 12 stocks on Kerschner's current list these three companies were the ones that, in our view, most shared these characteristics.
Biogen
Biogen is clearly a leader in the biotechnology industry. Through its drug Avonex, it owns 56.3% of the multiple sclerosis market. Avonex is used to delay the progression of the disabilities associated with the disease. Analysts estimate it will generate $564 million in sales this year.
Avonex should also benefit from growth in the market. "We expect the market for Avonex will continue to expand as Biogen receives FDA approval for other forms of MS and as the medical community shifts to favor earlier therapeutic intervention of the disease," says Albert Rauch of Everen Securities.
Biogen is not just a one-product company, either. It currently receives revenue from other major pharmaceutical companies from four drugs it licenses. It also has seven drugs in development for 14 indications. In 1998, the company boosted earnings 37%, fueling a 135% surge in Biogen shares over the past 12 months. According to Zacks, analysts project earnings should increase 27% annually for the next five years.
Lexmark International
Lexmark looks like another solid long-term buy. A printer manufacturer that was spun off from IBM in 1991, it went public four years later and has been a darling on Wall Street ever since.
What's fueling Lexmark's success is the increasing demand for inkjet printers. As more individuals and office managers purchase computers, they often need printers to go with them. And more often than not, they've been opting for the cheaper option -- inkjets. "Inkjet is the technology of choice on a unit basis in the U.S, with three-quarters of the market in 1997," says John Jones of Salomon Smith Barney. "Laser printers comprised only 9% of shipments, although they carry much higher prices. We do not expect any major change to this pattern going forward."
Hewlett-Packard (HWP) is the clear leader in this market, but the likelihood that it will increase its share dramatically is slim. Lexmark on the other hand, has plenty of room to grow and has already been stealing share from its competitors. By focusing on the low end of the market, Lexmark's inkjet sales increased over 100% last year and it currently holds 9% of the market. It doesn't hurt that it has an agreement with Compaq Computer (CPQ) to manufacture printers sold under the Compaq label. That's provided Lexmark with an important link to the world's top PC manufacturer.
While the company's overall laser printer sales have been declining, it does have a meaningful stake in the fast-growing color laser printer market. Its new Optra 1200, a speedy 12 pages per minute color model, is selling fast. Lexmark's earnings increased 56% in 1998 and its stock soared 117%. Zacks projects its five-year earnings growth at 18% annually.
Best Buy
One other company worth mentioning is specialty retailer Best Buy (BBY). It has been successfully stealing market share from competitor Comp USA (CPU) and has been a beneficiary of the increasing demand for cheaper PCs and televisions.
As consumer spending remains strong, people have been treating PCs and TVs almost as impulse buys. Best Buy hopes to capitalize on that by selling over the Internet. The hope is that customers will log onto its Web site rather than those of the direct vendors like Dell because Best Buy can offer a wide variety of other products. The company currently sells music CDs and DVD videos on the Web. It hopes to begin Internet sales of PCs by the end of the year.
Best Buy's shares have soared an impressive 175% in the last 12 months as earnings recovered from just one cent a share in 1997 to 52 cents in 1998. For the next five years, analysts are projecting 22% annual earnings growth.
smartmoney.com |
