Rule Breaker Portfolio

Playing the Celera Card
The allegory of a Rule Breaker

By Kevin Dewalt (TMF GetFit)
February 4, 2000

A potential Rule Breaker plops down at the poker table, snatches five cards from the top of the deck, and announces to everyone that it holds a wildcard. New rules apply in this game. As an investor in Rule Breakers, I make a side bet that the Rule Breaker will walk away with the dough.

At first, other players ignore the Rule Breaker. They've been playing this game of poker for a long time. They've won a lot of hands, they've made the rules. And they've never seen or needed this newfangled-wildcard-thing the Rule Breaker is talking about.

(Heck, they can hardly see this so-called "Rule Breaker" kid behind the pile of chips and cigar smoke in front of them.)

After a few cards are played, some other folks start circling around the Rule Breaker and betting on it too. "Did you see his hand," we say to each other. "He has a wildcard!" (A couple of observers also astutely notice that the Rule Breaker not only has a wildcard, but also made it appear.)

Some other folks around the table overhear our conversation and start laughing. "A what? Wildcard? Silly Fools, wildcards have never been a part of this game before. So you can just kiss your money good-bye. The Rule Breaker will get run out of the game by the other big boys at the table."

"Wow, we say to each other. These other players dissed us. They don't seem to understand or care what a wildcard is." So we sit and watch the cards play out.

SURPRISE! The Rule Breaker wins the hand! Those of us who bet on the Rule Breaker slap each other on the back. "Double our money!" we shout. Some folks cash out, take their winnings and move on to other games. Others of us hang out to talk about the hand.

"Man, did you see that? The Rule Breaker made the wild card appear! I'll bet he can do it again and win the majority of the hands."

"But couldn't the other players do it too?" someone asks.

"Sure," comes the reply. "But they have to license the technique from our Rule Breaker. There is some really big risk here, but I'm betting that the Rule Breaker will start winning most of the hands. This could be the next big thing.…"

A couple of new folks hear our conversation and start placing their bets on the Rule Breaker, too; in fact, bets on the Rule Breaker start getting expensive. The situation creates some downright hostility around the table.

"YOU IDIOTS!" come the cries. "Why in the world are you betting so much money on that pip-squeak of a player? THIS IS INSANE! The other players have been at this game longer. They have great skill at poker. They have a mountain of chips here to run your little Rule Breaker out of the game. Wildcards won't keep working in this game, you just got lucky with that hand. And besides, our players can make one if they want one."

We respond. "Guys, you might be right. We might lose our money. We understand the risks. In any case, isn't it worth your time to at least learn about wildcards?"

Back and forth the arguments go. At the same time, the cards are dealt and game goes on…

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Over the past 10 months, I've been an active participant and regular reader of The Motley Fool's Celera Message Board. I personally find the evolution of discussion totally fascinating. At first, it was just a handful of us struggling to understand what ATGC stood for and how Celera (NYSE: CRA) fit into this emerging field of bioinformatics. After a while, really smart folks joined the discussions and provided great information on Celera's business, technology, and the social and political forces at work in this industry. We spent hours, days, and weeks discussing and Learning Together.

When this portfolio issued its Celera buy report, the stock price shot up. And up. And up. And up some more.

Having seen this process on the Amazon (Nasdaq: AMZN) board, I knew what was coming. Overnight, Celera was thrust into the spotlight.

(Imagine the cigar smoke clearing for an instant and all eyes glaring at our Rule Breaker, alone on one end of the table.)

The tone and type of discussion on the Celera board changed instantly. The conversations have now become, among other things, a challenge-and-defend environment. So what happened?

What happened is that Celera won the first hand with its recent announcement that 90% of the human genome had been sequenced. Celera validated a lot of its technology and methodology with this accomplishment, which was ahead of its own already aggressive schedule. Celera BEAT expectations. It broke the rules.

The discussions and activity on the Celera board are completely predictable. A year ago, the cry was, "Amazon would have to sell books to every atom in the universe to justify its market cap! This is tulip bulbs all over again."

Rule Breakers are often unpopular companies. People resent success. People find change uncomfortable, particularly change that questions their own decisions and foundations about how the world is.

As I watched the discussions evolve on Celera over the past several weeks, I waited for a particular type of comment. I waited for someone to try and "fit" Celera into the old pharmaceutical paradigm and question the stock valuation. I got my wish with the following thread of posts.

Does Celera make drugs? No.

Can I justify Celera's market cap based on the old rules? No again.

I can observe that the pharmaceutical industry spends between $40 billion and $50 billion annually on research. I can also imagine that figure doubling or tripling in the next two years. And I can imagine Celera getting a larger and larger chunk of the pie. I can even imagine Celera demanding the highest profit margins of the industry.

Do I have doubts? Of course I do. Plenty.

But my bets are placed on this Rule Breaker and the cards are being dealt.

Have a Foolish weekend!