Another sterling day for the market, with the Nasdaq rising in excess of 6%, and The Motley Fool NOW 50 gaining 3%. The Rule Breaker portfolio continued its comeback, up 8%.
For the week, our portfolio added on over $100,000, for a total gain of 19%. Time to bring out... the Compounding Clown!!!
If our portfolio could keep up this torrid weekly pace, by the end of this year we'd be up 18,300% -- turning our present $672,000 into slightly over $124 million.
Wish us luck.
After such a big day, let's Foolishly focus our recap this weekend on the POOREST performer for our portfolio today, Amgen (Nasdaq: AMGN)... up a lousy 3%. This Rule Breaker core holding first visited RB-ville in December 1998, when we purchased our now 1160 shares at a then cost of $21 1/2. So in the 17 months we've held Amgen, we've seen a gain of 212%. Snazzy.
Snazzier are the company's financials. These are expertly and Foolishly summarized in this posting from Cathrone from this January. Though the numbers are a bit dated (since then, Amgen has reported two more quarters of data), the way Cathrone has presented a selection of Foolish measurements with year-over-year results gives you a very good and still mostly applicable 30,000-foot view downward at this extremely profitable enterprise. If I were to pick out one number on the list that is the most impressive and meaningful, it would be the net profit margins of the company: 33.8% (at the time -- 33% to close the year). That sort of profitability is off-the-charts, viewed in the context of corporate America or corporate Earth.
At its present price of $67 per share, Amgen is valued at a price-to-sales ratio of 21. That's a useful number we look at from time to time, because it enables you to stack up all companies (profitable or un-) and gain a similar view of their valuations. By contrast, Rule Breaker Amazon.com (Nasdaq: AMZN) has a price-to-sales ratio of 11, while eBay (Nasdaq: EBAY) has a price-to-sales ratio of 76. (Amazon and eBay have very similar market caps, by the way, both about $20 billion.) It is eBay that features a high-margin business model similar to Amgen's, whereas Amazon.com's business -- unless it radically changes -- probably won't ever feature such hardcore profitability.
All of these price-to-sales ratios feel about right.
Remember that the 33% net margin above means that for every dollar of sales, Amgen makes 33 cents in profits. I favor companies that feature double-digit numbers, but rarely do you see anything even as high as 20% (net -- that is, after all expenses and taxes).
Those are a few of the numbers that attracted us to Amgen as an investment opportunity in the first place. (The Foolish Amgen numerical snapshot is here.) Of course, Rule Breaker investing doesn't always have such numbers to go on, since many of our selections are quite early stage. For instance, when you're buying into a high-risk enterprise like Celera Genomics (NYSE: CRA) (whose CEO, Craig Venter, is on the cover of next week's BusinessWeek -- with the word EUREKA! over his head), past numbers count for very little; they're so small as to be almost irrelevant.
So qualitative decision-making always counts for much, in Breakerdom. This is why one kicks around for top dogs in important, emerging industries, and in the case of Amgen, we are talking about the most profitable, best capitalized company operating in biotechnology today.
Yes, we absolutely demand that our companies score extremely high on the Relevance Meter. What is the Relevance Meter? Would that it officially existed -- but it is, alas, just a subjective guide that you can attempt at home just as effectively as we do at work. Just ask yourself, "How much does my company matter? What if it disappeared tomorrow? Would everyone notice? Would anyone notice?"
Amgen, with its $68 billion market cap, has products that are integral in hospitals, enabling chemotherapy patients, anemics, AIDS patients, to grow back their red and white blood cells. While Amgen is in many ways known less than, say, Boston Market, Amgen counts for far more. Positioned at the forefront of biotechnology, with the biggest market cap and the largest bank account (a $1.4 billion cash position) to fund more research and acquisition, Amgen matters a ton -- even if the average American doesn't yet recognize the name. This fine posting from MargieWiggins, who injects herself twice a week with Epogen, is just one recent demonstration.
Again, take a quick look at Cathrone's posting (go on, now, if you haven't already -- you've made me ask twice!) to find a nifty summary of the biopharmaceuticals Amgen has in its pipeline. In addition to these future possibilities, Amgen is being challenged on its present offerings by a lawsuit from comparatively tiny Transkaryotic Therapies (Nasdaq: TKTX), which is contesting Amgen's patent on Epogen because it has a similar red-blood-cell growth stimulant it wishes to sell -- effectively, a different path to the same therapy.
Arguably, this lawsuit has held down shares of Amgen in the first half of this year, especially since Epogen represents half of Amgen's $3.3 billion in revenues. Amgen shares have dropped from a high of $76 1/2 to their present close at $67 -- still pretty strong in 2000, given the major selloff for biotechnology companies. Anyway, if you listen to Salomon Smith Barney -- supposing you would want to do such a thing -- if Amgen wins this case the stock could run up to $100-$140.
How do you follow the trial with Transkaryotic? How about via updates on our Amgen discussion board from a Foolish lawyer, sjhurst? (Here's the most recent one.) It's a great thread, as it features commentary and reactions from a number of molecular biologists, biotech scientists, and doctors, and yet is plain-English comprehensible.
Amgen has a good past history in legal challenges to its properties, having won a critical and valuable ruling in December '98 shortly after we purchased it, freeing its next-generation version of Epogen (NESP) from requiring any more payments to Johnson & Johnson (NYSE: JNJ), an early Amgen partner. The day after that ruling, AMGN shares ran up 14% -- on arguably a more important case than the Transkaryotic case. So I don't know exactly where Salomon Smith Barney is coming from (maybe they're kind of like this analyst), though I won't object to their being right.
To close for now, Amgen will almost certainly remain a long-term core holding of the Rule Breaker portfolio. While with each passing day it may look more like a Maker than a Breaker, that's OK; our goal is to buy companies as Rule Breakers and if they can ever grow and succeed to the point that they're a Rule Maker, we're happiest of all! We buy to hold.
Amgen is covered more extensively by our Motley Fool research team, which has filed this report, and will no doubt file many more in future.
I wish for you a most Foolish weekend. Fool on!
David Gardner
