Sirtex: Diary of a lucrative investment
Last week's takeover for Sirtex Medical means our 2010 recommendation generated an annualised return of 24%. Read on for how to identify the next one.
Let's wander back to 2010. It seems unremarkable in hindsight – the launch of the iPad notwithstanding – but in that year the seeds of a profitable recommendation were sowed.
Sure, the recommendation wasn't for everyone. For one thing it was a Speculative Buy on a biotech company, albeit a high quality and profitable one. But Sirtex still neatly illustrates Intelligent Investor's style of value investing.
Small biotechnology stocks are rarely a natural hunting ground for value investors. But we go where the value is, and in 2010 we scoured the neglected sector for opportunities. After turning over dozens of rocks, we identified just two potential diamonds – tuberculosis test distributor Cellestis and liver cancer radiotherapy provider Sirtex Medical.
Cellestis, recommended at $2.35 a share in Cellestis passes the biotech test, was taken over within a year at $3.80. And a $28 a share takeover offer for Sirtex was launched by US heavyweight Varian Medical Systems last week, delivering a 24% annualised return over seven years.
Learn and earn
What can we learn from these recommendations, including Sirtex Medical in particular?
Well it pays to look for quality. Sirtex and Cellestis stood out from the usual dross in the biotech sector because both already had products approved by regulators. What's more, they were profitable despite having minuscule shares of massive markets. Quality businesses are just better long-term investments, no matter what sector they're in.
You'll pay a little more for quality, with Sirtex and Cellestis trading on price-earnings ratios of 21 and 28 respectively when we recommended them seven years ago. It's a common misconception that identifying value is about buying stocks on low multiples.
You didn't need to be a scientist, cancer specialist or other expert to recognise Sirtex was an opportunity either. Indeed, industry insiders sometimes have trouble seeing the big picture. Successful long-term investing is about buying good businesses at reasonable prices and ignoring the ‘noise'.
It's also about understanding that good value is almost always associated with short-term problems. When we upgraded Sirtex it was mired in legal action, engaged in expensive and uncertain clinical trials, and threatened by new competition. The company's sales and profits had stalled after years of growth. Without these ‘warts', the buying opportunity in Sirtex wouldn't have arisen.
Hold your nerve
You also had to hold your nerve. Only a year after recommending Sirtex, its share price had fallen 27% as concerns about the cost of the clinical trial program developed. We stuck with it and, by the time of Sirtex in rude health in June 2012, the company's progress was becoming more obvious.
Only two years later, Sirtex's share price had more than tripled to $22.00.
Still the setbacks continued. In March 2015 an important clinical trial failed, sending the stock down 60% in a day. After recovering, it then fell 40% in December 2016 as sales growth disappointed. Share price volatility goes hand in hand with the high-risk and – if you get it right – high-reward nature of biotech investing.
Time heals all wounds, they say. It also has a habit of making the twists and turns of the past seem less troubling – in the stockmarket as in life itself.
In the end the initial litigation fears didn't matter. Nor did the ongoing threat from new competitors – in 2010 or 2018. The firing of Sirtex's chief executive was simply a bump in the road. Even the complete and utter failure of Sirtex to prove its therapy could be extended to other cancers didn't get in the way.
What mattered was buying a high-quality business at a reasonable price and then holding for seven years. As the series of recommendations over the period shows, it really can be that simple.
We'll leave the final (attributed) words to Jesse Livermore, a renowned stock market trader of the early 20th century: ‘It never was my thinking that made the big money for me. It always was my sitting.' Be patient – it makes all the difference in the end.
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