Hi, reference to dimethaid at the end of the interview.
Strange Ally for Bonds
Layth Matthews speaks with University Avenue's
Bob Boaz
On InvestorCanada.com
Nov. 4, 1999
MATTHEWS: Today I'm speaking with Robert Boaz who is Chief Investment Strategist at University Avenue Financial and Portfolio Manager of the University Avenue Canadian Fund, Small Cap Fund and Balanced Fund. Welcome Bob.
BOAZ: Hi Layth.
MATTHEWS: First of all, I want to do three mental prostrations to you for your recommendations of Biovail stock. You recommended it to us at $54.50 on February 10th, again at $58.60 on March 4th, and a at $56.20 on May 20th. Now I'm delighted to say that Biovail stock is trading at $92.90 a share.
BOAZ: It took a little while I guess, eh?
MATTHEWS: It didn’t take that long in hindsight. But boy, you really had to be sure about that pick in order to stay on it so consistently. It got to the point where we were rolling our eyes when you would recommend it again.
BOAZ: Now you're telling me that. But the thing is with Biovail they did have a number of applications before the FDA in the US that eventually had to come through. And you had to believe in their unique patented ability on these proprietary sustained released tablets, which generally, and very simply, allows people who have to take four or five pills a day, or even ten pills a day, they boil that down into one pill that provides the same amount of sustained release of drugs. That has been applied to many generic brands of existing drugs that makes Biovail just the kingpin here.
MATTHEWS: Biovail is providing this kind of biotechnology to other drug companies?
BOAZ: Yes they are, and they're also developing their own generic products based on existing drugs. In fact, they're taking a drug that now is being applied four or five pills a day, they're taking that and putting those four or five pills into one sustained release tablet. That's what is making them a lot of money right now.
MATTHEWS: Now that Biovail stock has basically doubled, what's your prognosis for the company? Are you happy with that?
BOAZ: You're not going to roll your eyes again are you?
MATTHEWS: No. I'm going to be listening very carefully.
BOAZ: I still believe it's a long term hold. This company tends to have more and more applications introduced every year. They are tremendously profitable. Don’t roll your eyes at this, but if you look at return on equity for Biovail, they are forecast to earn around 69% return on equity, which is huge. They have a clean balance sheet. Good growth numbers.
I'm going to keep it in my portfolio. It will grow over time, and don’t be surprised to see within the next six to eight months, Biovail trading well above $100, and it could easily get to $125, $130. It's just one of those companies, almost like BCE, you hold in your portfolio and you know it's going to go up.
MATTHEWS: It must have very decent management, and it's definitely blessed by the demographic trends, but you know pharmaceutical stocks in general, apart from Biovail, have lagged the last few years against their spectacular baby boom-based expectations.
BOAZ: That's right, and a lot of that has to do with the amount of competition, new products being introduced, new technologies and research being introduced in the marketplace that may take a winner into a loser very quickly. You have to look too, at the regulatory environment with many of these biotech companies. It takes a long, long time for many products to be introduced into the marketplace. Biovail has gone through that and now they're reaping the benefits of a lot of fast-track approvals by the FDA, which is great.
MATTHEWS: The other thing that David Foot, the author of 'Boom, Bust and Echo 2000,' mentioned to us is that the baby boomers probably will need lots of pharmaceuticals in general, but they are really not quite old enough that they're demanding it yet. So I imagine it will be a cyclical ride even for these stocks with great potential.
BOAZ: Absolutely. There are some other biotechs out there that are just wonderful companies that are still being ignored by the street. But the products are there, it's just a matter of being patient and sitting on these stocks. They will go up over time if they have the products.
MATTHEWS: We want to know about the other stocks that you think are more attractive, but before we go there, could you give us your perspective on what Canadian investors should be aware of around the world at this stage?
BOAZ: Sure. There are a couple of things happening that we basically anticipated and I think if you get away from the stocks and look at bonds right now, it's going to be beneficial for interest rates as we go forward. We know there has been a lot of nervousness in the US market about what the US Federal Reserve Board is going to do in the next meeting on November 16th, but what has been ignored recently is the European Central Bank and the UK Bank. They both raised interest rates this morning. The European Central Bank by a 0.5% and UK Central Bank by a .25%.
What that has done, quite paradoxically, is provide the bond markets with a boost because I think the viewpoint is that while economic growth is continuing in Europe, it is not tremendously buoyant at this stage. Rate increases will make it even less buoyant. That tends to be good for inflation and therefore good for bond markets as we go forward. We have to remember both Italy and Germany are experiencing some deflationary pressures, meaning declining prices in their marketplace. This can only exacerbate that situation.
In that sense, bonds may have hit a peak very recently Layth, given the fact that US treasuries hit a high in yield of 6.4% at the long end. They're currently trading close to 6.1% and I wouldn’t be surprised to see even lower bond yields as we go through the next few months.
MATTHEWS: What you're saying is that these interest rate hikes in Europe, and potentially coming our way in North America, are actually going to be kind of inflation-fighting moves and may actually boost bond prices, even though they're raising interest rates in the short run.
BOAZ: That's right. I think the market in the US too, is looking for at least 25 basis points from the Fed on November 16th.
When you consider again US treasury yields at 6.1%, but the underlying rate of inflation in the US is only 2%. My goodness, I look at the difference between the two, the yield of 6.1% and 2% inflation. That's a pretty high premium over inflation right now, and it tells me that perhaps there's room for long term bond yields to move lower because of that.
MATTHEWS: What would you say are the most attractive areas of the Canadian stock market to be investing in, in this environment?
BOAZ: I like a number of sectors. Oil and gas. If you talk to a lot of the oil and gas analysts in the street right now, they're bored because no one seems to want to buy a lot of these great oil and gas companies out west. But when you look at the situation in Canada right now and that industry, I can’t remember the last time you had a combination of strong oil prices as well as strong natural gas prices.
The combination of those two commodity prices in terms of strength will add tremendously to cash flow generation of the oil and gas sector as we go over the next couple of quarters. I think it will surprise the street. I don’t think there is a real expectation of how much money some of these companies can earn.
On the more conservative side, I really like the banks. I think they have bounced off their lows. With the declining long term bond yields, as we discussed, that tends to provide a bit more of a boost to the Canadian banking system, and that's where I think the major driving force of the TSE will be as we go into the new year.
And lastly, you have to look at the high-tech industry in Canada. If you look on a multiples comparison basis to comparable companies in the US, the Canadian high techs are tremendously cheap, but they do have some great names in the marketplace. I think those will be the areas to drive the marketplace as we go forward and therefore I'm obviously saying we're going to have a pretty bullish market going into the new year.
MATTHEWS: Do you have a favourite company worth mentioning in each of those sectors?
BOAZ: If you look in the oil and gas patch, actually there is a number of them. I'll give you a large one and a smaller one. Imperial Oil, IMO is I think the premiere integrated stock within the oil and gas sector. On the production side, look at Rio Alto, partly because of its high natural gas exposure, which I think is solid going through the winter months. But also it's just tremendously well-managed without a lot of debt on its balance sheets.
You go to the banks, this shouldn’t be a shock to anybody but I really like TD. I think TD has great growth prospects going forward. They're in the discount brokering business in the US, which is going to continue to be in a major expansion phase and they're also very big in investment management, which has to be the wave of the future.
On the high tech side, let’s look at a company that has recently seen some good contract signings. Encryption technology, which has been developed to a great extent by Certicom, (TSE:CIC). Watch that move because the more we rely on the internet, the more we rely on computer systems, the more security we need. Certicom's encryption technology is probably the best in the world currently.
Let’s go one step further. We talked about Biovail. I'll give you another bio tech that has been pretty well been ignored over the past little while: Dimethaid Research which provides another patented process. It's site- specific creams that will take the pain away from osteoarthritis, rather than taking ingesting a pill, you can get right to the pain with these creams. Just wait for the next few reports on Dimethaid. You're going to be surprised at some of the accomplishments this lotion can do. It's called Pennsaid, that is the product that Dimethaid basically produces. So there's a few stocks for you Layth that will keep your interest up.
MATTHEWS: All right. Well thanks for that list Bob. We'll be following those and we'll never roll our eyes again. Thank you very much for joining us today Bob, and for that great overview of Canadian investing.
BOAZ: It's my pleasure Layth.
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