Portfolio Update: New Subtraction and Addition (EMR and CELG; April 06, 2015)

by FI Fighter on April 7, 2015

in Stock Portfolio Updates

Celgene

 

It’s not really my style to trade stocks as I much prefer the strategy of Buy and Hold. However, yesterday morning, I used the upswing in the market to exit out of a position and enter into another one.

Yesterday, I sold 100 shares of Emerson Electric (EMR) at $57.47/share. After fees, I had $5,704.05 in freed up investment capital.

Since I already knew what I wanted to do, immediately after the transaction posted, I used the proceeds to purchase 50 shares of Celgene Corporation (CELG) at $114.00/share.

My original cost basis with EMR was $57.00/share, and after all was said and done, I pocketed $37.08 over the span of exactly one month (purchased on 3/6/15 and sold on 4/6/15). So, in essence, you could treat it like I collected a one-time dividend for my troubles… which will be taxed at an unfavorable rate… doh! 😉

Thoughts

Conflicting strategies? Yeah, you could say that, for sure. With EMR, you have a dividend stalwart that has been consistently paying out an increasing dividend for 50+ years. You could call EMR old reliable, because that’s exactly what you are buying into with this company. At today’s prices, I still think that EMR is a solid buy, but when I sat back and analyzed my overall portfolio, I wasn’t too comfortable with tying up so much capital into this one particular stock, at this time.

As readers may know, my strategy with stock investing in a taxable account is to create a blended portfolio that combines both dividends and growth.

The market is frothy right now, and I could be taking a huge gamble by swapping out of an attractively priced dividend growth stock for a hyper-growth one like CELG, but I was ultimately willing to take that risk.

CELG is the third biotech stock I’ve added this year, in addition to Gilead Sciences (GILD) and Amgen (AMGN). Many consider CELG to be one of the 4 horsemen of biotech (along with GILD and AMGN), and the company most primed for growth over the next few years. The only horsemen I don’t own is Biogen (BIIB). Funny, I always thought I would be collecting railroads, not biotechs!

Celgene focuses primarily on cancer treatments. As a whole, the biotech industry has been on an absolute tear over these past few years, and many would argue that we are still in the early innings of the ballgame. On the flipside, you could justify that things are getting out of hand and a massive correction will be in store shortly. In any case, biotechs are inherently risky plays since so much of their success depends on a robust pipeline to keep increasing revenues. Competition is fierce, and drug treatments are always susceptible to patent expirations. Further, research costs billions of dollars and most prospective treatments won’t win FDA Final Approval.

Either way, over the long-term, I feel like I want to be a part of the biotech growth story. My intentions are not to trade frequently, so if there is a significant pullback, my plans will be to simply buy even more shares, as long as the growth story hasn’t changed.

Yes, the 3% reliable dividend from EMR is very attractive, but at this stage of the game, I’m going to roll the dice and place my bets on hyper-growth.

CELG isn’t cheap by any means, as the current P/E is 47.5, and the forward P/E is 17.9. CELG also does NOT currently pay a dividend, which is always a factor in my decision to buy a stock.

Here are some key stats from Morningstar, where CELG currently holds a 3-star rating:

Screen Shot 2015-04-07 at 11.21.02 AM

With that said, I have about $20,000 in capital tied up into biotechs, or roughly 20% of my taxable stock portfolio. That’s an allocation I’m comfortable with… As usual, I like to balance out some of my more aggressive moves with conservative ones, and I’ll most likely do so again in the future.

It’s a tough balancing act, trying to figure out how to partition between growth, reliability, and passive income…

I’m a fan of growth stories, though, and hopefully this one pans out in the future… I’ve placed my bets!

 

Happy Investing!

{ 19 comments… read them below or add one }

1 Roadmap2RetireNo Gravatar April 7, 2015 at 12:11 pm

Surprised to see you exit a position in just a month and pick a growth stock. But whatever makes you comfortable and if you are willing to take the risk, go for it.

Ive been reading up about CELG lately and I like it. I wish it paid dividends…and like you said – its like the 4 horsemen of biotech – and I would love to own them all. I am still looking to add AMGN to my portfolio and will look at GILD sometime in the future. I havent really read much about BIIB to have an opinion, but I do see the name pop up now and again when reading about new drugs and FDA approvals. Lots of blockbuster drugs on the horizon in the space.

Best wishes
R2R

Reply

2 FI FighterNo Gravatar April 7, 2015 at 12:24 pm

R2R,

Yeah, probably not the best way to perform an analysis, but here’s how I did it anyway:

Suppose you gave me $5000, and asked me to invest in A) EMR or B) CELG. For the next 10 years, I do nothing, am not even allowed to follow the market, and instead go play on a beach somewhere…

At the end of 10 years, that $5000 gets returned back to me in the form of two baskets… Which basket would I choose?

I would go with CELG.

We’ll see! 🙂

Reply

3 MarkNo Gravatar April 7, 2015 at 12:45 pm

darn, I was all ready to congratulate you on your exit of EMR – a play I stated was a dubious purchase from the get go. Unfortunately you’ve jumped out of the frying pan and into the fire. Your scars will be harsh reminders of the burn you will take with owning biotech stocks at this juncture. The name of the game is buy low sell high, not buy at nose bleed heights and hope for the best.

…. A moment of silence for the money that FI just sent to the graveyard.

Obviously my heart isn’t for you to lose money or to wish I’ll on you which is why I am writing this comment to warn you. I like you and I empathize with your long term goals.

Reply

4 FI FighterNo Gravatar April 7, 2015 at 5:16 pm

Mark,

A little dramatic, don’t you think? As I mentioned above, it’s a riskier investment for sure, but it’s not as though I’m allocating my entire portfolio to this one stock. This one moves puts the allocation at just under 6%… When I make bold moves, I like to counter and buy something safer, which is what I’ve been doing.

Anyway, do you know where I can pick up your crystal ball? I’ll give you all my shares of CELG for one!!

Cheers!

Reply

5 MarkNo Gravatar April 7, 2015 at 7:24 pm

I am the crystal ball. Shoot me an email I’ll be happy to send you a snap shot of my returns. I’m not making 1000% returns in 1 day in penny stocks or anything absurd like that. I am an investor like you except instead of only looking at financial ratios (which is important) I study fundamentals ANDY technicals. That is why the writing on the wall for biotechs screams get out! I would honestly rather hold toxic mortgage loans in 2006. (Ok that’s an exaggeration) but you will take a blood bath in biotech.

But in one account I have 49.4% return from 2013 and in another I have 22% return from feb 2013 – feb 2014. A time when the s&p only did 15%. I didn’t cherry pick these dates it’s just that’s what the report showed me when I did a quick snap shot.

Don’t just throw your heard earned money at a dart board. I have you great advice in the past, home builders up over 12% since (jan/feb?). Now that’s money in the bank.

Reply

6 MarkNo Gravatar April 7, 2015 at 7:33 pm

Also thank you for the celg offer but you can just send me an ? watch and we can call it even. With the $ I make you, you can be Oprah and buy one for every member in the audience on this forum.

Reply

7 MarkNo Gravatar April 7, 2015 at 7:34 pm

AppLe

Reply

8 FI FighterNo Gravatar April 7, 2015 at 8:47 pm

If you can get me to Oprah’s level, I’ll buy you your own private road in Maui too, how’s that?

“I wanna be a billionaire… so freakin’ bad”

9 MarkNo Gravatar April 8, 2015 at 8:50 am

Deal and if you don’t follow my advice you can declare early bankruptcy and I’ll give you food stamps in the form of my quarterly tax payments 😉

All Good fun. Best of luck buddy!

Ps get out of bio stocks

10 The ProfessorNo Gravatar April 7, 2015 at 1:01 pm

I wouldn’t beat yourself up too much over P/E ratios. PEG ratios, in my view, are the most important. When you look at CELG’s PEG ratio, it becomes much more attractive. I’m more of a GILD fan myself, so I’m glad you are as well!

Reply

11 FI FighterNo Gravatar April 7, 2015 at 5:36 pm

The Professor,

P/E is just a surface level view for valuation, and obviously cannot be trusted completely without further analysis. Even if you were to just look at forward P/E, the story already looks instantly better for CELG.

And it also depends on your own take of GAAP vs. non-GAAP. For CELG, there’s a huge disparity, shown below:

Period GAAP EPS Non-GAAP EPS
Q1 2014 $0.66 $1.67
Q2 2014 $0.72 $0.90
Q3 2014 $0.61 $0.97

I agree that PEG also looks better, and management has been known to be conservative with estimates. CELG has a PEG of 0.8, whereas a “cheap” stock like GILD is at 2.0.

Anyway, ultimately if you’re buying in as an investor, then you have to have good confidence in future revenue/earnings growth and pipeline; that’s the bottom line.

I decided to just own 3/4 horses: AMGN, GILD, and now CELG. There’s my biotech ETF for you!

All the best!

Take care!

Reply

12 The ProfessorNo Gravatar April 7, 2015 at 8:44 pm

Is GILD’s PEG 2.0? For some reason, I thought it was below 1, but I don’t have their latest 10-K handy for me to check the math.

I’m also very jealous that you get to buy individual stocks. The only ones I have are from a couple years ago. I have to buy ETFs now because of securities laws, but buying individual stocks are so much more fun!

Reply

13 FI FighterNo Gravatar April 7, 2015 at 8:49 pm

GILD shows 0.78 on Yahoo. The 2.0 came from Morningstar, but that doesn’t sound right to me either…

Here’s how Yahoo calculates:

Yahoo! Finance uses 5-year expected growth rate and a P/E based on the EPS estimate for the current fiscal year for calculating PEG.

Reply

14 The ProfessorNo Gravatar April 8, 2015 at 9:06 am

That sounds better. I’m assuming the real PEG may be even lower than that because my guess it that Yahoo doesn’t subtract out GILD’s cash when it’s calculating the P/E ratio.

Here’s to GILD!

Reply

15 MartinNo Gravatar April 7, 2015 at 5:06 pm

Not my style either. I usually do not sell dividend stocks at all. If for some reason I do not like the stock (consider it expensive) I just do not invest new money in it and leave it paying me a dividend and invest elsewhere, but do not sell unless they cut the dividend. I rather wait and save enough to buy a new holding. But you have to do what is best for your portfolio to meet your target allocation.

Reply

16 FI FighterNo Gravatar April 7, 2015 at 8:50 pm

Martin,

I hear you, selling is usually not much fun, especially when you are cutting off branches of an income tree.

It’s risky, but I’m going for growth with this one.

Cheers!

Reply

17 No Nonsense LandlordNo Gravatar April 7, 2015 at 8:15 pm

You would be better off tax-wise with a Biotech ETF. Especially if you can get a ETF without trading fees. FHLC is one I like.

Reply

18 FI FighterNo Gravatar April 7, 2015 at 8:51 pm

Eric,

Yeah, I wanted some more control with the individuals. I like GILD and AMGN for the dividend and upcoming dividend, and wanted a dash more growth with CELG. I’m good with those Big 3.

Take care!

Reply

19 BryanNo Gravatar April 11, 2015 at 8:23 am

You people sure do like to over complicate this investing thing… And no offense Mark, but let us know what your returns are after 5 years compared to market. You might beat it, but doubt it. And hell, even if you do beat it, who is to say that is the right benchmark for your portfolio???

Don’t take the above too seriously, but seriously stick to the index.

Reply

Leave a Comment

 

Previous post:

Next post:

Copyright © 2012 FI Fighter