Biotech Values

[DewDiligence]

We’ve Been Here Before

[This is a “macro” piece, but it does mention a few stocks in passing: CLF, DNDN, CSCO, INTC, and GOOG.]

http://blogs.wsj.com/financial-adviser/2010/05/20/weve-been-here-before-time-to-buy-the-panic-stocks

›Thursday, May 20, 2010, 11:41 AM ET
By James Altucher

The market is ugly this morning on the face of…who knows? Greece? Fat fingers? Ignoring the many signs that the economy is in a “V”, traders once again feel the inclination to sell. But note that we’ve been here before, and we’ve seen worse.

• 9/11 – The financial system was physically under attack. The first time we were domestically attacked since Pearl Harbor. Lives were lost and we were in the middle of a horrendous recession and the bursting of the tech bubble. It really seemed to me at the time that the ATM machines would stop working and that only chaos across the nation would happen. That it was the end of the world. What happened? The government injected massive stimulus into the system via lowered interest rates, tax cuts, and other forms of direct stimulus. The result? Within three months, the market was higher than it was on 9/10 and although it then dipped again throughout 2002 the market went on to reach new highs by 2007.

• 1982 – Our largest trading partners were Mexico and the countries in South America. Our eight largest banks had 260% of their capital lent out to South America. A much greater amount than is currently lent out to all of Europe. Mexico, Brazil, Argentina, Chile, and several other South American countries defaulted. Not threatened to default. Defaulted. The economic system looked like it would collapse, particularly since we were just out of our own massive recession caused by Paul Volker trying to stop hyperinflation from occurring on our shores. What happened? We bailed out South America completely, restructured all of their debt, and the stock market rose 49% in the 1982-83 period.

• 1997 – On October 27, 1997, the Dow fell 7% on worries that the defaults throughout Asia were going to spread to the US and Japan (does the phrase “debt contagion” sound familiar?) Asia had been rapidly growing for the prior decade without much inflation but so much money flowed into their economies that it ultimately led to a debt crisis caused by massive speculation on their currencies. What happened? The IMF (fueled by the US) bailed out Asia, interest rates were cut, and our markets ended up higher on the year. (It’s perhaps this stimulus that, in part, led to the dot-com bubble that occurred in 1999…)

• 1987 – On October 19, 1987 the US market crashed 22% in a single day. Hong Kong crashed 45% in a single day. Everyone said capitalism was over. The markets actually ended up up on the year for 1987. The economy had been ramping up in the mid-80s (similar to 2009) but had begun slowing down and people were panicking that the good times were over, little realizing they still had a few years to go before a recession.

• The last time – Right now people are afraid we are having a relapse of the drop that started in October 2008 and ended early in March 2009. They’re thinking that somehow a few billion dollars in Greek debt servicing is equivalent to a trillion dollar leveraged subprime mortgage market. Guess what? We survived that and the market is [still] significantly higher than the lows reached.


The key now is to realize we are in a panic. That the economic data is still showing strong signs of a “V” and that there are many stocks out there trading for single digit multiples of earnings. Cliff Natural Resources (CLF) [actually, the name is Cliffs (plural); it’s the largest non-captive iron-ore producer in North America], for instance, is trading at about 4.8 times earnings (as opposed to a “normal” 15-20 times earnings)… Dendreon, while enjoying a well-deserved selloff, will eventually hit $70 as the market for its now-approved Provenge drug blossoms. Cisco, which is minting cash, trades for 13 times next year’s earnings. Intel trades for ten times next year’s earnings and has guided up. Not only that, they have beaten analyst estimates for the past three quarters and have done an unusually good job of predicting future economic strength due to the nature of their business of selling chips into every pocket of industry. Even GOOG is near its lowest level ever in terms of multiple of earnings, trading at just 15 times next year’s earnings despite 40% year over year growth and beating analyst estimates for the past four quarters in a row.

Don’t throw out the baby with the bathwater. I know it’s hard to look at the quote screen. But we’ve been here before and worse. And we’ll flourish out of this situation as well.‹