That's a lot of bread, any way you slice it.
It's the amount of money we left on the table when we bought Celera Genomics (NYSE: CRA) on Dec. 17, 1999 for a split-adjusted $39.75 a share, rode it all the way to Feb. 25, 2000's intraday high of $276, and then all the way down, to yesterday's $20.22 close. Powered in part by Celera's astonishing trajectory, the Rule Breaker Portfolio's value came close to $1 million in Feb. 2000 -- its highest value to date. At yesterday's close, it was worth $347,281.
We don't pretend to try to time the market, but if we had sold Celera at its intraday high of $276, we would have $322,283 more than today, minus short-term capital gains taxes. That is a lot of money, no doubt about it, and it's only a little less than the value of the Rule Breaker Portfolio at yesterday's close.
Could we have known to act differently?
The running of the bulls
Here is a look at Celera's run:
RB CRA Total Date Port Value CRA Price CRA Value Return 12/17/99* $854,061 $ 39.75 $ 50,085 -- 02/25/00** 955,456 242 304,920 -- 03/06/00 919,076 247*** 311,220 521% 01/03/01 409,616 93.25 117,495 135% 04/18/02 347,281 20.22 25,477 -49%*purchase CRA
**CRA hits intraday high of $276; highest RB Port value to date
***CRA hits highest close of $247
We're admittedly living through a great market... There are few stronger performers [than Celera] across all markets since our purchase of Celera shares on December 17th. The company has entered the media spotlight. Related to this, there are few brighter prospects in business today than the use of genetic insight to create revolutionary solutions. Celera is in the spotlight, and it is flashing! But... is that light a beacon to guide our way into the brave new world of the next few decades?... [as this Rule Breaker Strategies discussion board post opined about the bioinformatics industry]
Or... is that light in a pan?
A few days before on Feb. 25, 2000, and without knowing that it would be the day of the highest RB Port value and the highest price at which Celera would trade for the next years, Jeff Fischer (TMF Jeff) looked at Celera's astonishing price gain:
What was the big news? Nothing new... Other than [its new share offering], not a peep of additional news arose from the company. All the news that people need to know is already out there, apparently: Celera could finish sequencing the human genome fairly soon this year, ahead of schedule. In fact, Celera plans to use money raised from the stock offering to essentially increase its "study" power, which is the next step for its business -- it must study what genes do what, how we can stop certain diseases, and so forth.
The company has a market value topping $14 billion and meaningless revenue. The bet is that Celera can grow revenue quickly by selling genomic information in expensive, long-term contracts to pharmaceutical giants and other corporations.
Those are our italics now. We knew in Dec. 1999 that the revenue was meaningless. And this was hardly the first time we'd watched new companies' stock prices explode, though this was no "mere" explosion; it was more of a vault into warp speed. Remember, Celera had multiplied about seven times our purchase price in two months, while the Nasdaq was "merely" doubling. Remember how your stomach felt then?
Was Celera a flash in the petri dish?
Celera's revenue has grown rapidly, but not fast enough to justify either those early lofty expectations or, some would say, any expectations today:
Year Revenue Annual Mkt.Cap. Change Ending (mils.) Rev.Growth (mils.) Mkt.Cap. 6/30/1997 $ 0.9 6/30/1998 4.2 367% 6/30/1999 12.5 198% $ 406 6/30/2000 42.7 242% 5,023 1137% 6/30/2001 89.4 109% 2,337 -53% 12/31/01(ttm) 123.2 38% 1,727 -26%
Let's look more closely at the quarters around that fateful Feb. 25:
Revenue Quarterly Mkt.Cap. Quarterly Quarter (mils.) Change (mils.) Change 06/30/99 $ 5.1 -- $ 406 09/30/99 8.3 63% 1,041 156% 12/31/99 8.3 0% 3,848 270% (2/25/00 -- -- 12,995 !!!) 03/31/00 11.0 33% 4,935 28% 06/30/00 15.1 37% 5,023 2% 09/29/00 18.3 21% 5,947 18%
We use sales here because Rule Breakers often have no current profits or free cash flow. Fast revenue growth is a proxy for the magnitude of profit and free cash flow growth if things continue well.
Any individual investor -- regardless of investing strategy -- would recognize that the stock price growth far outpaced growth in revenues for the quarters ending Sept. and Dec. 1999. But it was a screaming red flag when the market cap exploded and culminated in Feb. 25's $276 intraday high (see bold entry in chart above). Faced with this kind of disparity between stock price and sales growth, a Fool is well advised to put on a thinking (jester) cap and consider at least a partial sale.
The business limits of bioinformatics
In March 2001, Jeff and Tom Jacobs (TMF Tom9) interviewed William Haseltine, CEO of our holding Human Genome Sciences (Nasdaq: HGSI), who said: "The most long-term value will be made from products that can be sold to a broad consumer base: drugs, food products, and probably individual health services. The greatest value lies here. Investors should be more cautious of companies that only have scientists or other scientific companies or institutions for a customer base."
He continued, "The power of modern technology is to reach deeply into the consumer base, reaching millions of individuals."
So, over the next few decades, "drugs will most likely have the highest profits," Dr. Haseltine concluded. "Diagnostic tests linked to new cures will be lucrative, too. Then new [biotech-related] food and health services that reach most consumers individually -- that reach deeply into the consumer base."
We had hoped that Celera's bioinformatics would lead to consumer applications. In the buy report, we wrote: "Celera's consumer brand lacks now.... but Celera has the potential to be one of the most important consumer brands in the world. If Celera can provide to you and your family your complete, personal genetic map, you would likely hold Celera very near and dear to your heart.... In fact, Celera may become one of the most important brand names in your life."
But the company now tells investors that it is focusing on drugmaking, where several companies, including our holdings Human Genome Sciences and Millennium Pharmaceuticals (Nasdaq: MLNM), are way ahead in applying genomics and proteomics (hey, now we're hearing cellomics) to drugmaking.
Tom began questioning Celera's potential in Dec. 2000, when Celera shares sold for $47.50, more than double their current value. "In the absence of lucrative drugmaking deals... or large-scale consumer applications, it takes plenty of faith to imagine a Rule Breaking future for any bioinformatics company, let alone Celera." But even with a drugmaking future for Celera, Tom argued: "In the best case, we might expect Celera to hit $200 million in revenues in a year or two, and then start to add steadily larger milestone payments, with royalties not for eight or 10 years from now. For long-term high returns, I'll hazard that it's really 10 years from now when Celera truly becomes interesting...."
Diagnosing Celera's possibilities
Could Celera pull a Millennium and use its cash and stock to buy an existing company with marketed drugs, boosting its revenues and providing more of a base for a drug business? Maybe, but it doesn't have the existing drugmaking infrastructure of a Millennium or Human Genome Sciences. Frankly, Celera's behind the curve. The wild card is its 50% share of privately held Celera Diagnostics, bursting with top talent from Roche Holding's diagnostics operation, but Celera's not the leader there either.
Our community has weighed in strongly on the current state of the business and the effect of J. Craig Venter's departure as president, and Fools have offered both optimistic and pessimistic views of Celera's future.
The next bull market
There may not be a market runup as wild and crazy as the Nasdaq's in late 1999 and early 2000 again, but you can bet there will be another bull market. To be ready, we're not advocating some anodyne like "sell when a stock gets ahead of itself" -- which is a tautology, if you think about it -- but rather that when it becomes very, very difficult to imagine how a company's business can grow sales such that it could support the current valuation, consider selling part of your holding.
It's tough, but you could gird your loins and take some profits, despite the tax bite, which here would have been the highest short-term capital gains rate. The risk is always that you would eliminate your potential to profit by being wrong. We sold some of our America Online -- now AOL Time Warner (NYSE: AOL) -- when it began to balloon, but if we had sold all of it we would have missed out on years of future growth and the juice for a very large part of this portfolio's performance. Twenty-twenty hindsight is always easy, but perfect foresight is not. So it may make sense to sell part, but not all, of a holding.
Let your winners run, but when they run so far away that they just might be lost, it's good investing strategy to consider reining them in some. We don't pretend we could have sold Celera at the high, but we confess that there was plenty of room to part with a good piece of that $322,283.
Have a Foolish week! Updated port returns below.
The Rule Breaker Team -- David Gardner (TMFDavidG), Jeff Fischer (TMFJeff), and Tom Jacobs (TMFTom9) -- is available for functions to sing, "D-N-A, R-N-A, M-O-N-E-Y!" Click on their profiles to see their stock holdings, just a few tasty morsels comprising The Motley Fool's delicious disclosure policy.
Rule Breaker Portfolio Returns as of 4/1/02 Market Close:
RB Port S&P 500 Nasdaq Week -2.59% 1.31% 2.77% Month 0.00% -0.07% 0.94% Year* -12.09% -0.13% -4.50% Total Return** since 8/4/94 363.04% 150.12% 158.63% CAGR*** since 8/4/94 27.35% 12.71% 13.21%
*We plan to add $25,000 in April: $12,500 for the quarter and
$12,500 that we didn't deposit in Jan.
**For the Portfolio, this = (Current Value - All Cash Deposited)/All
Cash Deposited. Because we add $12,500 quarterly, this isn't
as meaningful as (see next item).
***Compound Annual Growth Rate using Internal Rate of Return.
This performance measure accounts for the periodic deposits.