Out Fox The $treet

Our philosophy isn't to pick stocks based on ones potential for a buyout, but this theStreet.com report caught our attention. Harry Rady of Rady Asset Management owned biotech company Cephalon (CEPH) that recently got a buyout offer from Valient International (VRX). Since Stone Fox Capital also owned CEPH in our Opportunistic folios it was intriguing to see what else he picks, since we might have similar investment styles. Looking over his list we actually already own one of his top picks in Savient Pharma (SVNT). He also lists Activision Blizzard (ATVI) and NuVasive (NUVA) that have been on our radar. Might be time to double up research on these picks. Rady sees 100% gains in both SVNT and NUVA and interesting that they are both in the medical/health sector like CEPH. SVNT has been a long term holding that we've ridden to the $20s only to see it crash back below $10 when the sale of the company failed. With the new management team in place, they appear to be the stronges...

March was another volatile month. The month ended on a solid note with the Opportunistic Levered model ending with a 2.3% gain compared to a slight loss for the SP500. Considering this model ended the month with considerable leverage on the long side, its always very positive when it outperforms the market in negative months even if the loss was negligible. As mentioned in the March Investment Report, the market was in need of a selloff and the SP500 got that in the form of a roughly 7% drop to the intra-day low of 1,249 on March 16th. While many experts continue to expect and expected a larger selloff, in our view this was the buying opportunity we were waiting on. Added More Long Exposure Since we expected a drop to around 1,250 to be close to a bottom in the SP500, we added more long exposure around the middle of March. Specifically we added exposure to the oil services and commodity sector to benefit from the rebuilding in Japan and continued emerging market growth. Also our r...

Barron's has a good summary of the Cephalon (CEPH) buyout announcement from yesterday. What's interesting and has kept us in the stock is that Valeant Pharma (VRX) traded up 12.8% today. This is unheard of for the bidder in a hostile deal to increase especially that dramatically. Apparently the market thinks the deal is very cheap with the analyst from Hapoalim Securities speculating on a significant increase in the bid of up to $86. Several of the analysts increased their targets on VRX suggesting that the cost savings and ability to borrow low cost debt makes this deal very appealing. The $300M in savings would be incredible for a $5.7B deal and essentially covers all of the interest payments. All of this points to a likely bump in the bid assuming the BOD at CEPH doesn't out right block the deal. An offer potentially in the $80s would likely be deemed attractive. It will keep us around for a while. Eventually though the potential upside might be limited and risk gre...

Interesting news after the bell today on Cephalon (CEPH). Valeant Pharma (VRX) went public with a $73 all cash offer to buy CEPH. The deal would be valued at $5.7B and represents a roughly 25% premium from the closing price. Naturally VRX claims a 29% increase from the 30 day trading average, but going back the last year CEPH recently traded at 52 week lows. Shareholders are likely happy to see an offer with the stock swooning of late, but anybody holding the stock for most of the year sure expected a higher valuation and isn't exactly happy. The claims by VRX are normal of hostile bids suggesting that the management of CEPH has done everything to prevent this deal even going so far as to make several acquisitions themselves in order to block the deal. Possibly valid, but this isn't a scorching high valuation. CEPH is a key holding in our Opportunistic funds, but honestly the investment has been slightly disappointing having a loss on the investment until this announcement...

Cephalon (CEPH) again raised estimates for 2010 to $8.3 and provided guidance for 2011 of $8.55. Typically though, don't expect much action in the stock tomorrow. Although the stock remains incredibly cheap at a sub 8 PE, the market is concerned about drugs coming off patent and a slowing of growth. Its interesting listening to conference calls as analysts dig down into minute details. They seem to over analyze every bit of data and seem to miss the big picture that this biotech company has a great management team that continues to under promise and over deliver. CEPH now has $1.2B in cash and annual cash flow of around $1B though they do have $1B in debt. At a market cap of $5B the company could theoretically buyback 20% of the company just using the annual cash flow. That of course wouldn't be the best use of cash as I'd rather see them continue to buy up small biotechs with promising drugs that they can use their expertise to help bring to market. It is a great indic...

Our Opportunistic and Growth portfolios aim to capture excess returns, but not without some diversification. Limiting portfolio sizes to 20-30 stocks allows for diversification without getting to levels of diworstification. Hence, the portfolios have always had a few 'risky' biotech stocks. Based on the results of Savient Pharma (SVNT) the rewards have clearly outweighed the risks. See previous post. Oh why didn't I include SVNT in the Opportunistic Portfolio???? Regardless the Growth Portfolio has seen some nice out performance demand on the back of SVNT being up 33%. Also noticed that the other biotechs in those portfolios have been perking up of late. All 3 stocks have seemed alot cheaper then the risk involved. Rigel Pharma (RIGL) and Cephalon (CEPH) have seen bullish trading of late. Not being predisposed to investing in this sector, we just found the valuations too compelling. RIGL is a clinical-stage drug development company that discovers and develops novel, sm...

Prior to the opening Cephalon (CEPH) dramatically and surprisingly upped guidance by some 30%. CEPH didn't provide any details for the smashing results or provide full year guidance. The lack of details regarding the durability of these results is likely holding the stock down to minimal gains today. Regardless of the details, CEPH already traded at a forward PE of just over 8 so any news on beating estimates should send this stock soaring. The market continues to discredit positive news. Great opportunity to buy on the cheap. The company now anticipates that sales for the second quarter 2010 will be between $705-715 million , up from the previous sales guidance of $645-670 million resulting in basic adjusted income per common share for the second quarter 2010 of between $2.17-2.22 , up from the previous guidance of $1.65-1.75 . Due to the company's expectations regarding second quarter 2010 financial results, the company is suspending its previously issued full-year 2010...

After falling non-stop since the end of March, it finally appears that the downtrend has been broken in Cephalon (CEPH). Since closing at a high of $72.10 on March 23rd, CEPH has continuously remained below the 10ema all the way to several days trading at $56. Today the stock not only handily zoomed above the 10ema but also the 20ema signalling a clear change of direction. Stone Fox Capital added to the Opportunistic and Growth Portfolios a few weeks back around the closing range of $59. Clearly we got on board a few weeks too early, but the price was too compelling at now just 8x next year. Also, it was an opportunity to build up some biotech exposure after the healthcare reform was finalized. The best part of adding this position now is that the risks are well defined. Healthcare reform is now known and the 20ema provides a downside limit.

Our Growth and Opportunistic Portfolios purchased Cephalon (CEPH) last week during the downturn. Ockham Research has a good summary of the Q1 report. This basically sums up our investment thesis as well so we won't repeat it here. The company guided towards $7-7.20 for 2010 yet the market continued to sell the stock down into the upper $50s or below 9x guidance. Its interesting that the current highest estimate is only $6.98. Analysts apparently doubt the guidance. Though trading below the 200EMA is concerning from a technical basis. Today's weak bounce means the stock is likely to lag any rebound in the market. If it doesn't hold, we made trade it for a lower entry. The value thesis just becomes more attractive at lower prices.