Subject:
Lone Star Growth Investor Update
Date:
Mon, 04 Oct 1999 20:34:35 -0400 (EDT)
From:
JDancy7658@aol.com
To:
lonestar@ListService.net
The following is an update on: (1) How equity ownership has created an
imbalance in wealth distribution in the U.S.; (2) Why short term traders now
dominate the market; (3) Barron's definition of "wealthy"; (4) The fact
that the biotech sector is attracting more interest; (5) Investment articles
on the Internet; (6) AudioInvestor.Com investor inquiry; and (7) An update on
Model Portfolio companies.
******************
EQUITY OWNERSHIP & INTELLECTUAL PROPERTY SKEW WEALTH DISTRIBUTION
Technology has created tremendous wealth in the American economy. But this
wealth has not been evenly distributed across society. For example Bill Gates
- Chairman of Microsoft Corporation - is worth five times more than all black
American households combined according to an article in the Journal of Blacks
in Higher Education.
* Wealth Becoming More Concentrated
Wealth in the U.S. is becoming more concentrated according to several recent
studies. The top 1% of U.S. households hold 39% of the nation's wealth - up
sharply from previous decades. The wealthiest 10% of Americans dominate the
markets, owning 82% of the value of all equities - and capturing a like
percentage of any gain or loss.
Commenting on these studies, a Washington Post article claimed that "the gulf
between the rich and poor is now greater than at any time since the Great
Depression."
Courtland Milloy in another recent Washington Post article noted that Gate's
wealth from securities, stocks and bonds was about $58 billion in 1998. Black
wealth from stocks and bonds was calculated at about $11 billion, and while
incomes are about 60% of whites, the "wealth gap between the races is
enormous." The latest U.S. Census Bureau figures on American wealth showed
that only 614,000 black households, or 5.6%, owned stocks or mutual fund
shares.
Other segments of the population have somewhat higher market participation
rates - Edward Wolff, an economist at New York University, claims in a recent
study that overall 43% of American households own stock - but still this is
far below even one-half of the population. Participation in the market has
increased from around 25% in 1983.
* A New Gilded Age?
The uneven ownership of equities, and the restricted grants of stock options
to a select few is one reason the gap in wealth is widening according to
these studies - and the gap has been enhanced by the explosion of wealth
created by technological advances.
This "may be the single greatest period of wealth creation in American
history" according to Forbes Editor Michael Malone. Forbes notes that the 100
wealthiest individuals in the U.S. technology industry are worth nearly $200
billion, with most of that wealth being created in the last few years. "This
is an extraordinary statement both about the nature of the booming American
economy in the 1990's, and about high technology's central role within it" he
noted.
And those relative few who happen to work for technology related companies
have done very well if they have been granted options in their company's
stock - or participate in the company's 401(k) plan.
* Technology's Role in Creating Wealth
While Bill Gates is the richest man in the world, his wealth can be described
in two words according to a recent London Times article: intellectual
property. Microsoft makes its money from the copyrights and patents that
accompany its computer software. In that article the Times notes that the
distribution of the company's software costs very little. The value derives
from the license to sell or use the software program - a program that has a
very limited physical presence.
And the Times notes that "Microsoft is not alone. Look at any of the growth
industries of the next century and you will see they are underpinned by one
or more forms of intellectual property. Companies working in sectors such as
the Internet, biotechnology, pharmaceuticals, sport and entertainment all
have a heavy dependence on intellectual property rights for their prosperity."
Many of these technology companies have gone public in the last decade and
are growing strongly. And many are in the small and micro cap sector of the
market that is the most inefficient. So individuals have the opportunity to
become part owners of these growing firms.
* The Role of Financial Education
If current trends of wealth concentration continue, at some point it will
become politically popular to address this social "problem." Capitalism has
historically created significant wealth disparities, and governments have
used taxes, laws and regulations to redistribute such wealth.
Intellectual property is somewhat harder for governments to regulate than
physical assets that constituted wealth in the past - it is easily relocated
elsewhere should tax or regulatory policies become onerous.
So how should we address this growing disparity before it becomes a political
issue?
First, for those working, the availability of 401(k) or similar type
retirement plans and IRA's should be expanded, and companies should encourage
active participation in such plans - as well as distributing options on
corporate stock well past the executive and professional suites.
Second, as we move into a technology-based economy education and training
will play a larger role in preparing a party for the workforce. This
training, and access and familiarity with computers, e-mail, and the use of
the Internet, will be critical. The percentage of the U.S. population without
Internet access is still quite large.
Third, it is critical that as we evolve into a technology-based economy and
more parties manage their own finances that they understand the potential and
the risks involved in investing in equities, mutual funds, or any other asset
- and the risks and problems associated with not making such investments.
*************
SHORT TERM TRADERS DOMINATE MARKET
The Internet, and the popularity of trend-following investment styles, have
lead to an explosion in short term trading strategies. In a recent article in
the New York times John Bogle, the founder and senior chairman of the
Vanguard Group, discussed this trend and some of the problems it creates for
investors.
Bogle notes that the annual turnover rate for equities has risen to a
half-century high of 95%, closing in on the all-time high of 119% recorded in
1929. This means the average investor holds a share of stock on average for
only one year. Stock trading over the Internet is now said to account for
more than 20% of all market volume, and on every business day of 1999,
investors have traded some 1.5 billion shares.
In 1960, the turnover rate was just 12% and a longer term outlook was the
norm, with a holding period of six or seven years. Much of the current
trading activity comes from institutional managers according to Bogel, who
noted that "once characterized as long-term investors, most fund managers can
now be fairly described as short-term speculators. "
Liquidity - the ability to buy and sell a reasonable quantity of shares
without impacting the price and with a reasonable "spread" - becomes an
issue for those managers who actively manage their portfolios. For that
reason larger companies are much better suited for those who actively trade
and manage any substantial amount of money. The shares of small companies
have languished.
But the costs of trading, extended over time, are "confiscatory" according to
Bogel. He writes: "Assume a 10% market return over the next 25 years. An
initial $10,000, simply invested in the stock market, would grow to $108,300.
Now assume investment costs of 2.5% and extra taxes of another 1.5%. The
investor accumulates but $42,900, fully $65,000 less than the market. The
investment croupiers rake in 44%, and the government croupiers rake in 16%.
The casinos flourish. But not the investor. Having put up 100% of the capital
and assumed 100% of the risk, the investor would receive barely 40% of the
return. It is not a good deal."
* Longer Term Opportunities
What do intelligent investors do? Bogel wrote "first, they realize that the
key to investment success lies not in trading pieces of paper on a short-term
basis (what most funds do), but in owning shares of businesses and holding
them for the long term."
"Some may do this by retaining investment managers who emphasize a
buy-and-hold strategy. (Warren Buffett's strategy is to buy shares in a small
number of large companies, and his favorite holding period is 'forever.')
Others simply buy their own stocks and hold them for the long term. . . .
investors using such strategies have the best possible opportunity to ride
out any short-term disappointments and enjoy optimal long-term wealth
accumulation."
He concludes that "in the long run, the best way to capture as much of the
stock market's return as is possible is to buy and hold stocks and minimize
the costs of investing. In this way, investors can capture 98% to 99% of the
market's pre-tax annual return, after the deduction of costs."
************
BARRON'S DEFINES "WEALTHY"
A recent article in Barron's asked the question of how wealthy a person would
need to be to move from "affluent" to "out-and-out rich." By taking the
adjusted gross income of the 95th percentile of the population, then
calculating how much cash could be generated from a conservatively invested
portfolio, they came up with an answer of at least $2.02 million in invested
assets.
At this level they noted that you would be considered "beer and pretzel"
rich, but would not be dependent on a job for continuous income unless you
choose to continue working. The Barron's article noted a survey of those with
assets of more than $1 million, and noted it found that 85% were married, 90%
did not inherit their fortune, on average they saved 27% versus the average
national savings rate of 2%, and 43% of their portfolios were in stocks or
stock mutual funds.
************
BIOTECH SECTOR RETURNING TO FAVOR
Much like the current Internet sector, biotechnology companies were the main
focus of Wall Street growth investors in the early 1990's. But, as Michael
Murphy has noted "anyone who bought an index of biotech stocks at their
height in 1991 would have had a negative return through 1998."
This may change shortly for a number of reasons. First, many biotech
companies are projected to become profitable for the first time in the next
few years. Second, the number of biotech drugs nearing the end of the FDA
testing and approval pipeline has increased substantially. Third, many larger
pharmaceutical companies are searching for new products that can add to
corporate growth, and biotech companies have some very attractive potential
products nearing the market.
We have interviewed two experts in the last month on this sector, and their
interviews can be summarized as follows:
* TIM BEPLER - ORBITEX HEALTH AND BIOTECH FUND
Tim Bepler of the Orbitex Health and Biotechnology Fund notes that genomics
will revolutionize the drug and health care industry, bringing new treatments
and drugs for cancer, alzhiemers, depression, and cardiovascular diseases as
researchers are able to "drill down" to the DNA and genetic level to find
effective compounds or treatments for these common disorders.
With genomics it may be possible to reach down to the genetic level to
address health problems, creating tremendous opportunities to address common
health problems and to develop treatments that today are just theoretical -
but could be developed and brought to market sooner than many think.
He also notes that as more biotech drugs reach the end of the development
pipeline and are approved by the FDA we will see many biotech companies
become profitable in the next few years. Companies can get products approved
quicker under recent FDA streamlined policies - which means that they can
recognize cash flows earlier, making the business more valuable in the
market.
Genomics companies he thinks are attractive include Human Genome (NASDAQ:
HGSI), which has a strong product pipeline and a library of intellectual
genetic knowledge from which to build new drugs. A second company that has
very impressive technology and good management in the genomics sector is
Millennium Pharmaceutical (NASDAQ: MLNM).
Celera Informatics (NYSE: CRA) sells genetic information to pharmaceutical
companies so that they can develop and analyze existing compounds, and this
company has a strong future according to Bepler as larger companies access
the data in an attempt to maintain impressive growth rates by developing new
products.
Bepler notes that while most of the rally in the biotech sector this year has
been confined to the larger companies, he thinks it has begun to broaden to
include smaller companies - and that this trend will continue for at least
the rest of the year. The quest for growth by larger drug companies will make
many of these smaller biotech firms with new products in the pipeline
attractive from an acquisition standpoint, which will help sustain sector
valuations.
He looks for companies with products or services that will generate cash flow
in the near future, that are well managed, and have impressive technology.
Before buying Bepler visits with management, and conducts quite a bit of due
diligence before committing funds to a company in this sector.
"Technology platform" companies are also attractive to Bepler, including
Enzon (NASDAQ: ENZN), a company with an impressive record at improving the
molecules and structure of existing compounds making them more effective when
administered. Alkermies (NASDAQ: ALKS) has developed technology to allow
sustained release formulations of compounds, which makes drugs more effective
and easier to administer in an effective manner.
Many of these technologies extend the life of a patent, which allows a
company to increase the net present value of the cash generated from existing
products. Sepracor (NASDAQ: SEPR) is another company that has an excellent
record at reformulating drugs making them more effective.
Vertex (NASDAQ: VRTX) has an HIV product nearing the end of phase II trials
according to Bepler, and also a product being developed to address cancer.
Both are impressive, as is the management of the company.
While he generally is not investing in larger pharmaceutical companies due to
the lower growth rates, he thinks three are very attractive right now:
Pharmacia Upjohn (NYSE: PNU), Bristol Meyers Squibb (NYSE: BMY), and American
Home Products (NYSE: AHP). These three have excellent management, strong
product pipelines, and growth potential according to Bepler.
Outsourcing is also a trend in the industry, with more clinical research
being outsourced to third parties who specialize in this area. Companies in
this sector that he likes include Quintiles (NASDAQ: QTRN) and Covance (NYSE:
CVD). The major question with this sector is whether these companies can
maintain their impressive growth rate. ChiRex (NASDAQ: CHRX) also is an
impressive company according to Bepler, which specializes in the outsourcing
of manufacturing capability for certain products.
Two other companies that he finds impressive are Cardinal Health care (NYSE:
CAH), which has a very efficient and well managed company, and PE Biosystems
(NYSE: PEB). PE Biosystems provides analyzers to genomics companies, and
while it is not cheap Bepler notes it is still attractive. The entire
interview on Real Audio can be accessed at
audioinvestor.pyxos.com
Bepler notes that many of the smaller companies have exciting risk/reward
ratios at this point, with the potential of increasing in value five to ten
times from current levels. Rarely do you find these types of valuations
according to Bepler, and he hopes to exploit them in his fund.
* MATT BERRY - MEDICAL TECH STOCK LETTER
Matt Berry, Assistant Editor of the Medical Technology Stock Letter, notes
that larger drug companies are looking to add to their product pipeline which
makes smaller biotech companies very attractive acquisition candidates.
When looking for attractive companies the Medical Technology Stock Letter
looks for a number of factors, including technology, the target market,
competitors, management, the science involved, and the number of products a
company has in development. Because many of these companies are not
profitable current profits, or lack thereof, are not a great concern -
especially if products are well along in the approval process.
Companies Matt likes include Chiron (NASDAQ: CHIR). The company has an
excellent new management, and has streamlined the focus of the company to
concentrate on controlling costs and recognizing earnings from developed
products.
Another favorite is Isis Pharmaceutical (NASDAQ: ISIP), which is a buy below
$20. The company has a product to treat a symptom of AIDS, and while the
market is not large the product approval validates the technology that ISIP
has developed. The drug turns off the disease by accessing the proteins that
cause the disease, and this company is a "steal a current price levels." They
also have an interesting drug being developed for Crohn's disease.
Matt also likes Ligand (NASDAQ: LGND), which he thinks is well managed. The
company has a product that may be used for breast cancer, and has a number of
other products that are interesting. The company should be profitable next
year.
Corr Theraputiecs (NASDAQ: CORR) is in the cardiovascular market, and is a
potential takeover or merger candidate. Sales have "ramped up" very
favorably. ICOS (NASDAQ: ICOS) is also a favorite. The company is working on
a drug that could be the "next Viagra" with fewer side effects. Eli Lilly is
the development partner in the male erectile disfunction product, and they
have four or five other products that are very attractive. Bill Gates owns
13% of the company, and it was founded by the founder of Amgen. It has a very
diverse product pipeline, and a good clinical development strategy.
Last, Matt likes NPS Pharmaceutical (NASDAQ: NPSP) who he thinks is
undervalued. Amgen is a partner with NPSP, and the company has plenty of cash
with encouraging results so far with products in development.
The entire interview with Matt can be accessed on Real Audio at
theaudioinvestor.com
*******
LONE STAR MODEL PORTFOLIO DEVELOPMENTS
U.S. merger and acquisition dollar volume in the first quarter of 1999 was
nearly double the $185.8 billion recorded in the same period last year. And
last year - just like every year since 1995 - all records for the value of
merger and acquisition deals both worldwide and in the U.S. were shattered.
According to some experts, the merger and acquisition trend is still in its
formative stages. Piper Jaffray in a recent study calls the activity the
"fifth major M&A wave of the century." Since the beginning of 1998, a total
of 18 Red Chip Review covered companies - all small caps - have been
acquired. And with the recent news on Align-Rite (MASK) four companies in the
Lone Star Model Portfolio have been acquired, merged, or gone private in the
last year. We expect the trend to continue.
The following updates activity on the Model Portfolio selections:
* ETHICAL HOLDINGS (NASDAQ: ETHCY) has "very good" transdermal patch
technology for hormone replacement therapy (HRT) treatments according to a
500 page, three month study of the drug delivery sector of the pharmaceutical
industry by Front Line Strategic Management Consulting Inc.
Transdermal patches provide the most benefits at this time in the HRT sector
for a number of reasons. The company has a number of very attractive products
in late stage development that may make them "a major player very soon"
according to Hau-Chau Tran, an author of the study. HRT is a major market
that is expanding as the population ages, and this treatment addresses both
osteoporosis (bone loss) and heart disease related issues.
Our interview with Hau-Chau on the drug delivery sector, and her comments on
ETHCY, are available on Real Audio at
audioinvestor.pyxos.com
* AREMISSOFT (NASDAQ: AREM) - Mark Johnson of the Internet Financial
Connection on the Silicon Investor recently interviewed us on why we like
Aremissoft. The interview is available on Real Audio at
audioinvestor.pyxos.com
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* ALIGN-RITE INTERNATIONAL (NASDAQ: MASK) - U.S. photomask maker Photronics
will buy Align-Rite for about $115 million in stock to help it meet the
growing demand for equipment used to create circuit patterns on computer
chips. Under the terms of the agreement Photronics would pay Align-Rite
shareholders the equivalent of $23.09 per share.
The merger of Photronics and Align-Rite moves the new company into a
leadership position in the photomask market according to a report recently
published by The Information Network, a market research company. Industry
consolidation is continuing, and the merger moves the new company ahead of
DuPont Photomask as the leading supplier of photomasks. We like the outlook
for the merged entity.
Our interview, conducted with the CEO of Align-Rite on the industry and the
company, conducted this spring, can be accessed at
audioinvestor.pyxos.com
Rite%20Int. %20(MASK)%20-%20Semiconductor%20Sector
* SEMX INC. (NASDAQ: SEMX) - We have been told that orders remain strong for
the specialty materials manufactured by SEMX, and Doug Fant is finalizing a
report on why thermal expansion is a major issue for electronic
manufacturers. We think the company is very attractive at these prices. His
interview with Frank Polese of SEMX can be accessed at
audioinvestor.pyxos.com
nc.%20(S EMX)%20-%20Semiconductor%20Sector
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AUDIOINVESTOR MEDIA/INVESTMENT INQUIRY
AudioInvestor.Com is an Internet educational broadcasting company. They seek
to provide educational material on technology, economics, and finance from
some of the best sources over the Internet, and are seeking media partners to
assist them in this goal. AudioInvestor is also seeking accredited investors
interested in assisting in the financing of their global educational
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visit theaudioinvestor.com
***************************************
INVESTMENT ARTICLES ON THE INTERNET
Our "Interesting investment articles on the Internet" can be found at Mark
Johnson's Internet Financial Connection forum on the Silicon Investor at
techstocks.com
***************************************
LONE STAR MISSION
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issues and strategy. It is a closed, confidential, moderated mailing sent
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please let us know.
******
Joe Dancy, Adjunct Professor, SMU School of Law, Editor - Dallas, Texas
Doug Fant, Mobil Oil Corp., Contributing Editor
Mark Johnson, Internet Financial Connection on the Silicon Investor,
Contributing Editor
Lone Star Growth Investor
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