Linear thinking works most of the time. When I, for example, decide to compare the stocks of retailers, I know that same-store sales works. You can make a judgment on an apples to apples basis by using that metric. Same with restaurants.
You can tell the airlines apart by revenue per seat mile and its progeny.
You can measure the profitable drug companies by their current sales, their pipelines and their patents.
You can rank tech by average selling price and gross margins to be sure about real competitive threats. I think return on equity and tangible book value work well to understand the financials.
I think organic growth works as a way to measure consumer packaged goods.
All-in costs, production growth and cash flow can determine prices for oils.
But the problem is these metrics just don't work for some of the most visible companies that I get asked about most of the time: the development-stage biotechs, the ones without any earnings and barely any sales -- if any at all.
Last night we did a story about Portola Pharmaceuticals (PTLA) , probably one of the best biotech development companies out there. Yet it just doesn't lend itself to any of the linear schematics I fall back on when I evaluate stocks.
The company's metric is a yea/nay FDA vote. That's too hard for many people. It's too hard for me. And this, remember, is the best of the best of this kind of company because, unlike so many other developmental companies, it has an approved drug. It's just not yet being sold.
Portola has an excellent FDA-blessed anti-coagulant and a yet-to-be-blessed anti-anti-coagulant -- not making that up -- and we can have no real idea how much either is worth yet. Will it have good sales on its one improved drug? Will it have a second drug approved? Is the company worth $3.7 billion, its current valuation? Is it worth $1 billion? Is it worth $10 billion?
It's just not clear at all.
I think I made that point when I did the Mad Money piece on Portola last night.
But here's what I wish I had said last night on the show. If you can measure by a linear metric, then a judgment can be made and you can invest with a knowable amount of risk. If you can't though, as is in the case of so many biotechs, you have to accept that your risk is unknowable and the only people who can invest with that parameter are NOT the people who are willing to lose everything they invest in it, but the people who have a ton of money or the people who are young enough to risk losing everything they put in.
I say this because I have fielded thousands of questions from investors and the more I think about the Portolas of the world -- and I like Portola very much -- the more I recognize that when you have a stock that has run this much, many things have to go right to make it pay off. Yet, at the same time people might say they are willing to lose a ton of money on it but if it turns out they do, they really weren't willing and end up being furious. Furious at me.
Still though, I know that things may play out positively from another, lower level from here -- and if people can't handle a stock that can go down in price before it goes up, then Portola isn't for them.
Further, if Portola had NO approved drugs, I am beginning to believe it couldn't be bought at all -- unless there's a degree of certainty that I have found to be very elusive.
Have I become too conservative?
No. I think, however, that when I look at the vast majority of the biotech companies that have come public in the last five years, I am astonished at the losses that have been taken.
Astonished. The ratio is just terrible.
So, I have come around to believing that it has become my job to say no. To say, go find someone else to say it's fine. The losses, at a time when there are so many magnificent gains in plain old stocks, have become too great.
I have yet to reach a decision on a total ban on recommending those companies with nothing approved where they are rolling the dice.
But I am certainly coming around to it. Too much money has been flushed down the proverbial toilet.
To my mind, after last night, I think that the outer limits of recommendations for me of a biotech development company will be a Portola, a loss-making company with several drugs in the pipe and one of which has been approved.
Beyond that, I am tempted to say, without at least one approved drug going forward, take a pass. Get someone else's blessing. It can't be from me.
Too much money's being lost in this group.
It just isn't worth it.