Tuesday, April 25, 2006

Update on IBA

On April 5 I suggested that IBA might be a risky holding at the moment, since its price will probably plummet when H5N1 flu eventually hits Mexico, or even the United States, either in birds or in humans. Had you followed my sage hints and sold then, you would have missed out on the 17%-or-so price appreciation since then, which seems to have been caused by good earnings, a feeling that chicken stocks in general are oversold, and an article about this last in The Wall Street Journal. (I haven't seen the actual article, since the WSJ is only available by subscription where I live, so I don't know if the article mentions Bachoco by name.)

So I was wrong. Or was I? It's not easy to tell. That's usually the way things are when ordinary common sense points in one direction, but the possibility of a rare and catastrophic event points in the opposite direction - in this case, the ordinary rules would say that IBA is a good buy, but what if it does nosedive terribly when bird flu hits North America?

It may be possible to quantify the risk/benefit relationship when one starts out with good hard numbers, but with very rare events, or events which have never occurred previously at all, one never does. If my vague memories are still worth something, the philosophers of mathematics don't like calling this one much more than I do.

Thursday, April 20, 2006

How Not to Buy a Stock

I've got too much cash, and I can't get rid of it, because everything is too expensive lately. I can't find any short-term income securities with yields significantly higher than cash, I don't want to buy longer term income securities now that the yield curve seems to be righting itself, and the screens which I usually use to find value stocks turn up nothing I want.

Out of exhaustion, when I no longer knew what I was doing, I bought Dendreon Corporation (DNDN). A free teaser by Michael Murphy says that if you buy it "you could easily see a $5,000 investment grow to $7,500 in six months and even triple your money in 2007." (He doesn't mention the name of the company, of course; for that you have to pay for his newsletter.) I bought it because the published Phase III results for Provenge at least show a statistically significant advantage over placebo, and management themselves seem convinced. An insider made a large purchase above recent prices, and the company is gearing up for commercial production.

If I weren't exhausted, though, I wouldn't have bought it. As someone else in a blog points out, a particularly expensive treatment which adds four months to average life expectancy will never be a blockbuster. In fact, I'm not sure that the FDA will approve it at all, although in a very small trial it did increase survival at three years in the relevant form of prostate cancer from 11% to 34%.

At the moment, Dendreon is a speculation on other investors' behavior. There is a way it might become a good investment for you, though, if not for me. If Provenge gets an "approvable letter" from the FDA, the price of DNDN will dive for a day or two, as always happens when a one-trick biotech of this kind gets the disastrous news that its product will very likely be approved. Buy it then. Look at ICOS. Look at Vicuron. If you have any faith in the treatment being developed at all, always buy a biotech after the approvable-letter nosedive.

Wednesday, April 05, 2006

Time to sell IBA (Industrias Bachoco SA ADR)?

Industrias Bachoco ADRs seemed to be a good buy a few months ago. Its price parameters were within the lower end of their ranges, earnings and demographics looked good, there was a lot of insider ownership, and it paid a large dividend, which should provide some downside protection.

Since then, it has dropped slightly. I've been wondering: a meaningless blip, or something more important? Maybe something more important. Maybe the threat of H5N1 (avian flu). And maybe I was the last to notice.

H5N1 is probably going to hit Mexico within the foreseeable future, just like it is probably going to hit everyplace else. I have seen what will happen from close up, in the case of H5N1, and from my computer screen in the case of other diseases and other animals raised for food. Bird flu may hit Mexico five minutes from now, or it may it a year from now. When it does, there's going to be large-scale culling. What's more, there's going to be an enormous drop in chicken sales, justified or not; the drop will probably be even bigger to the extent that the levels of literacy and education in Mexico are not quite what they should be.

Chicken sales will nosedive, IBA's sales will nosedive, and IBA's stock will nosedive. The question is, when to sell?
      

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