The Blog of Evermore

Run for the hills?

August 10th, 2011

Since my last post on July 20th, the S&P 500 has fallen 15.5%. The decline really set into motion upon our fearless leaders agreeing on a debt limit deal. It almost seems as if the debt limit controversy was a distraction and once it was “resolved”, people began focusing on the current state of the macro-global economy.

The news has not been good. The events in Europe are starting to resemble a slow-motion train wreck. There is nothing anyone can do and it is hard to look away. Stateside, the economy is still looking feeble. While the latest employment report was not terrible, there seems to be a renewal of large layoff announcements by major corporations. Although the Federal Budget is expected to continue to run deficits, the latest agreement will result in reduced expenditures further pressuring state and local governments finances.

The prospect of reduced Medicare reimbursement rates is being reflected in the stock price of many companies. One example is Almost Family (AFAM). AFAM is a company I’ve had on the radar for quite a while but have never quite felt like pulling the trigger. Last year the home health care industry ran into the headwind of an investigation into billing practices. They had just started to emerge from this threat when presumably the debt limit deal has ignited the fear of reduced reimbursement rates from Medicare. As a result, AFAM has seen its stock price drop from the low 40’s just over a year ago to around 17.50 now.

Things to like about AFAM are its balance sheet and the fact there is no denying that demand for home health care is only going to rise over the coming decade. On the downside is the prospect of a profitless prosperity as the industry may be able to “grow” but see little in the way of profitability.

Another market segment that was ravaged recently was the small and micro-cap biotechnology and pharmaceutical industry. There appear to be a number of reasons for this, the first being the overall market conditions. But I believe there are several other factors likely at play here. These stocks tend to be very volatile and therefore often held by the most aggressive investors. Once these stocks start to drop, they can run into a flurry of stop losses set up (foolishly in my opinion) by individual investors. Additionally, margin calls can be triggered forcing some indiscriminate selling.

Former market darling Denderon (DNDN) reporting a disappointing second quarter with a relatively bleak outlook also took the steam out of this segment of the market. This news hit certain stocks also involved with cancer vaccines particularly hard (such as Celdex (CLDX) and Seattle Genetics (SGEN).

Note: since I first penned this (and prior to posting) I have added to my Celldex and Biosante positions. Of note, insiders for both of these companies have also taken advantage of the recent market swoon. Other stocks of interest are Synta (SNTA) and Dusa (DUSA). I had dumped my shares of Dusa too early last fall, only to see it rally from almost the day I sold. I’m still not seeing the growth in their Blu-Ray equipment that I would like to see however. I will be listening to their recent conference call before making a decision.

I was fortunate to have read this article prior to the recent selloff and decided to cash out my Immugen holding before the selloff. I was able to dump it at $14.93 and it now sits at $10.00. My return on that investment was almost 100%.

I also decided to dump the remaining portion of my LSI holdings. Again, I was fortunate enough to do this prior to the most drastic selloff and sold out at $7.40. LSI now sits at $6.58. Both IMGN and LSI have some momentum (LSI) or relatively near-term catalysts (IMGN) and I will consider getting back in if they drop further (and once the market begins to stabilize).

I have not been as fortunate with Corning (GLW). As I posted earlier, I bought more in the low $17 range and then again at $15.30. Corning continued to drop and now sits at a paltry $13.20. This is an example of one of my weaknesses. I tend to be too eager to jump on a stock after it takes a hit and I often catch the proverbial “falling knife.” Long term I think I’m fine with the holding but it is always hard to see how much better of a price I could have had if only I could have been more patient.

As far as future moves, I am still eying some media stocks. If we continue to see a sell-off, I may add Comcast to my holdings. I still think someone will want to buy Sprint at some point, but their debt level is keeping me at bay. However, if they drop much further, it may prove to be a worthwhile gamble. With AT&T and Verizon threatening to start extracting more from consumers of wireless bandwidth, I would think that obtaining access to wireless infrastructure would become appealing to someone, perhaps even Google.

While I sold off some of my AT&T and Verizon, I continue to hold a position for the dividends, stability and the fact that they largely control both the internet backbone and mobile computing infrastructure. Unlike internet access to the home, the FCC has, for now, placed fewer restrictions on the wireless carriers ability to monetize their wireless infrastructure.

The information and opinions on this site are not meant to serve as financial advice. I am not a financial advisor. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional This site is merely intended to provide what I hope is interesting information and opinions.

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