The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
Protein Design Labs
Fremont, Calif.
$16.28
52-week low-high: $13.79-$27.58
$1.6 billion market cap
By Charly Travers (TMFBreakerCharly)
Current Motley Fool Rule BreakerProtein Design Labs has everything a biotech investor could hope for. It has a fast-growing and diversified revenue stream, a deep pipeline of drugs, and, most important of all, a clear timeline for becoming cash-flow positive. There are many biotech companies that are extremely high-risk because of deficiencies in these areas, and I want it to be clear that PDL is not one of them.
The best reason to own PDL is not for the revenues that will jump from $96 million last year to more than $250 million this year or for the very good chance that the company will become cash-flow positive next year. While all of that is great, the single best reason to be excited about PDL today is its drug Nuvion, which is in clinical trials for severe ulcerative colitis.
Hands down, the top biotech companies develop drugs for diseases in which their competition is minimal or nonexistent. Then they dominate that niche and attain very high market share with a high-margin product. There are 40,000 patients in the U.S. with severe ulcerative colitis who have no treatment option other than having their colons surgically removed.
Do you consider that a good choice of options? I sure don't. This is where Nuvion comes in. In early clinical trials the drug has shown phenomenal results in treating these patients. Don't take my word for it, though. Take a look for yourself on page 7 of PDL's investor presentation. (Warning: It's not for the squeamish!)
This is an excellent market opportunity. I have Nuvion pegged as a blockbuster in the making, and this will propel PDL into the top tier of the industry. Those who take notice of PDL today can watch it before it happens.
Fool contributor Charly Travers owns shares of Protein Design Labs.
Yahoo!
Sunnyvale, Calif.
$31.11
52-week low-high: $20.81-$39.79
$43.2 billion market cap
By Rick Aristotle Munarriz (TMF Edible)
Surviving the first round wasn't easy. It's great to know that so many of you simply aren't voting alphabetically. And now up against another Rule Breaker? Great. Who wants to play this time? Protein Design Labs, you say? Bring it.
Look, I know that the stock's got game. Biotech stocks know how to dribble (that's a joke for the lab-coat crowd). But let's take a look at both of these players. Last year Protein Design grew its revenues by 44%, while Yahoo!'s top line soared by 120%. Protein is into antibodies, while Yahoo! is into anybody -- and everybody. With 345 million unique users in 25 countries, Yahoo! is everywhere.
Last year the company generated $844 million in free cash flow as profits -- yes, profits -- more than doubled. With double-digit net margins and more than a billion bucks in operating income before appreciation and depreciation last year, why wouldn't one get excited to learn that Yahoo! expects to close in on $1.5 billion in operating profits this year?
Sure, all but 16% of the company's revenues come from online advertising. That's because sponsors covet the eyeballs that Yahoo! attracts every day to its collection of popular destinations -- free email service, message boards, and classifieds, just to name a few. And then there are its established, stand-alone sites, such as HotJobs.com and its Music Match media massaging software. Investors need not worry about Yahoo! having so many of its eggs in the ad basket. Rival Google
You can hope for Protein Design to land another blockbuster drug, or you can invest in the reality of Yahoo! -- in that the online migration by offline advertisers is real. Its acquisition of Overture landed it the pioneer in paid search, and, with sponsors paying as little as a dime for a qualified lead, it's easy to see why ad budgets keep devoting more and more room for Yahoo!'s billable Web space.
With or without clinical trials, Yahoo! is the picture of health you want on the court with you.
Longtime Fool contributor Rick Munarriz does Yahoo! -- but he doesn't own shares in the company.
Rebuttals
I Yahoo!, too. Everybody does. For a lot of people Yahoo is "The Internet."
Yahoo! is also a very expensive stock. It's not just trading at 50 times earnings because that is a gross understatement. Look into the dark recesses of the 2004 10K and see that incorporating stock compensation expenses into net income would slash earnings by more than $200 million.
Those are Yahoo!'s numbers, not mine. Now all of a sudden we're looking at a P/E of 70. Great company or not, having lived through the tech bubble we all know what happens to stocks with valuations in nosebleed territory. -- C.T.
If you're buying biotechs, the great work that Charly is doing in Motley Fool Rule Breakers is required reading. But why buy into a company looking to become cash flow positive next year, when you have one that will top $1 billion in free cash flow this year? Why fret about clinical trials and pipelines when Yahoo! has proven fat-margin productivity and is still growing quickly? C'mon, it's Yahoo! time. -- R.A.M.
Who won? Go here to cast your vote.
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