Buying Home Depot & Amarin

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control."

- Charlie Munger

The Portfolio

Year-To-Date the portfolio is up +24.12% at the time of writing this post, markets are still open.

Our benchmark index, the S&P 500 is up 22% YTD.

If you're an investor looking for diversification and growth, and you'd like to know more about the way I build a portfolio; please feel free to email me. clay@claybaker.com

BUYing Today

I've been looking for two kinds of companies, a great buy and hold forever company with a solid dividend and a long term high growth company. Home Depot and Amarin are both fitting the bill and both are pulling back today. By now all my readers know how much I love seeing great companies go on sale. Both of these companies are seeing their stock prices decline due to short term factors that don't indicate any systemic problems with the businesses.

The big news for the portfolio is that I've decided to roll it forward into 2020. In the past I've always sold off the portfolio at year-end, bought a whole new portfolio on the last trading day of December. The point was to make a fresh start, like none of the past performance ever happened. This year I'm going to continue forward with the gains we have and continue to growth the portfolio just as any of you would do with your own portfolios.

Home Depot (HD)

This company is a perennial favorite of mine, though its never been in the blog. I think it's long past time to begin a position in this great company and leave it as a core position that I'll add to over time. Home Depot isn't just a warehouse for homeowners with DIY projects, it's the leader in the Pro market too. That Pro market business is what makes me look at building permit numbers as a backdrop to why Home Depot should continue to perform.

The Commerce Department reported on Tuesday that construction on new homes reached 1.314 million in October. Housing starts were up 3.8% from September and 8.5% from the same time last year. October was the fastest rate of building-permit authorizations recorded since 2007, and was the second best month for housing starts in 2019. Also, the home-builder confidence index hit a 20-month high in October. With all this building activity heating up I have to look elsewhere to understand why Home Depot stock is pulling back. At year end, profit taking is always one answer. In the most recent earnings call Home Depot beat earnings but missed on revenue estimates. Management went on to caution on future performance because investments in logistics and fulfillment for eCommerce are not contributing yet. Home Depot sells a lot of lumber and the recent deflation of lumber prices is definitely depressing revenues. Strength across all the departments, including growth in pro and DIY customers' all contributed to growth in online traffic and average ticket. Same-store sales growth came in at 3.6% vs. 4.7% expected. 3.6% is an excellent number, maybe analysts were expecting too much from the third quarter. Home Depot also had some costs attributed to some legacy computer systems and identified that Black Friday, HD's biggest sales day, falls into the 4th quarter this year.

Since the same quarter last year, revenues slightly increased by just over 1%. Revenue growth made it to the bottom line boosting the earnings per share. Over the past year shares are up 24.84% outpacing the S&P 500 Index. Over the past 2-years Home Depot has shown a pattern of producing excellent earnings per share. During the past fiscal year, improved its bottom line earning $9.73 versus $7.28 in the prior year. This year, estimates are for continued improvement in earnings ($10.12 versus $9.73). Net operating cash flow has declined marginally to $3,922.00 million or 0.10% when compared to the same quarter last year, but not enough to be a concern.

Home Depot's P/E ratio indicates a discount compared to an average for the sub-sector and a value on par with the S&P 500 average of 22.89. This suggests that Home Depot is trading at market, and any additional pull back in the share price should be seen as an opportunity to buy. With a TTM P/E at 22, and management forecasting a Forward P/E of 20, we can expect some modest earnings growth over the next year. But keep in mind that this is a 10-year investment, not a 1-year trade. On December 11th Home Depot will be holding an investors day conference where we might get more information. My guess is we'll get more cautious news from management and an opportunity to create a larger position will present itself.

My Call: I like Home Depot (HD) below $222, I like it a lot more around $212-$219, and we're quickly getting there. My Price Target is $273.

Initiating: BOUGHT 10 shares @ $220.80

Amarin (AMRN)

Next up is Amarin, a Dublin Ireland based biotech company that is developing new drugs to prevent major adverse cardiac events (MACE). The company's lead product is Vascepa, a prescription-only omega-3 fatty acid capsule, used as an adjunct to diet for reducing triglyceride levels in adult patients with severe hypertriglyceridemia. It is also involved in developing Vascepa for the treatment of patients with high triglyceride levels who are also on statin therapy for elevated low-density lipoprotein cholesterol levels.

Amarin recently had an Advisory Committee (AdCom) meeting to review their application for a label expansion of VASCEPA. First, street mythology calls VASCEPA fish oil. VASCEPA is not fish oil, its primary ingredient is 'derived' from fish oil and provides a significant benefit in that it does not raise bad cholesterol the way over-the-counter fish oil does.

Vascepa, is an omega-3 based treatment for hypertriglyceridemia, with a proven record of reducing triglycerides in adult patients. Vascepa has been commercially available since 2013, and is predicted to reach $2.2 billion in annual sales by 2024. The company reported Q3 revenues of $112 million, up 103% from the year-ago quarter. The company also reported over 865,000 new and repeat orders for the drug in the quarter, up 9.9%. With a unanimous vote of 16-0 by the AdCom, Amarin is now waiting on the FDA to make a final decision on a label expansion for Vascepa which hopefully will include patients at risk of a heart attack and other major adverse cardiovascular events (MACE). The company should get either a full expansion as they requested or a limited expansion by December 28th.

Currently I estimate that VASCEPA has a total addressable market (TAM) of about 4 million patients. The most likely label expansion to be approved by the FDA should increase the TAM to approximately 40 million patients. Should the FDA give Amarin everything they've asked for, the TAM could be as large as 60 million.

Why is the stock price declining? Early this morning Oppenheimer came out with a bearish article and a downgrade on Amarin. I'm not impressed by the Oppenheimer call. The dramatic headline makes for good reading, under a blanket with a flashlight, but not much else. Leland Gershell may be right, but looking at his track record, I'd short Leland on every call he makes, but hey he got Agile Therapeutics right! Even a broken clock is right twice a day. Sorry for the personal attack, but I find initiating calls like this to be dubious at best. Gershell is calling for Amarin to decline to $7/share. To get to $7 we would need a complete gutting of Amarin's business. My view is that the label expansion is good for an already good business. Based on the AdCom and the FDA's exuberance we can assume some level of label expansion will occur, we might even get more from the FDA than we're expecting. But AMRN does not REQUIRE the label expansion. Even without the label expansion VASCEPA revenues are good for a share price of $10-$12/share. Getting to $7 is hard to see. The good news is that there are several avenues for AMRN to continue to seek further label expansion in the years to come. I'm usually suspicious of an analyst initiation with a contrarian view soon after good events (positive adcom, rise in in stock price, etc.) as it has the optics of having a less than righteous agenda. Gershell also points to 'competition' as a factor that will cause Amarin to decline. Would someone please list all the Biotech companies that have suffered when they had first mover advantage, already selling well in the marketplace, while the competition was in Phase 2 or 3. VASCEPA has 133 international patents, 25 US patents, 211 patent applications. Amarin is the sole supplier of the generic ingredient in VASCEPA; icosapent ethyl. Any competitor has to navigate the existing and applied for patents and buy the generic ingredient from Amarin. Otherwise competition has to develop a completely new compound with superior benefits. That's great, bring on the competition, patients will be the big winners. For now, I'll give the advantage to Amarin.

Joseph Edelman is a hedge fund veteran who started Perceptive Advisors in 1999 with $6 million. With annualized returns of 30%, Perceptive has grown to $5 billion in assets under management. Edelman specializes in small-cap and mid-cap biotech companies. Biotech is probably the most volatile sector in the stock market, so it’s important to be diversified. Edelman has thrived in this difficult business for the last twenty years; and he just doubled down on his existing investment in Amarin.

One of the best biotech analysts is Jefferies Michael Yee. Yee stated “While some investors do not like the risk/reward debate on the December 28 potential FDA approval and label wording, [we are] not too concerned about the exact wording. Based on commentary by the FDA at the end of the panel, [we think] the agency might be broader on the label than some investors expect. Expect Amarin to rise toward $30 per share...”

My Call: I like Amarin (AMRN) below $20, I like it a lot more around $18-$19. This is a long term hold, I see 5+ years of growth. I'll add at lower prices if the thesis continues to hold up. Near term target price is $30.

Initiating: BOUGHT 100 shares @ $19.50

"Markets don't go to zero, Portfolio's do.

Buy quality, be patient...and look twice for motorcycles."

- Clay Baker

Stay Invested,

Clay

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Keep Me Honest

  1. S&P 500 declines to 2,350 or more (1-3-2019)

  2. Healthcare and Biotech sectors outperform (1-3-2019)

  3. S&P reaches 3,000 by year end (1-11-2019)

  4. CSCO reaches $60/share (1-18-2019)

  5. VEEV reaches $145/share (2-14-2019) (achieved $145.23 on 5-10-2019)

  6. CVS reaches $91.50 (2-27-2019)

  7. Bull market takes another leg up (4-7-2019)

  8. The Fed will lower rates 1-2 times (5-13-2019)

Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't, Stay Invested

Rule #4: When a good stock you own drops 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Rule #7: When an investment bank sells below book value, buy it

Rule #8: Tips are for waiters. Do your research.

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

HD, AMRN, BSTC, CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD, HD, AWR, XLNX, MRVL, NBRV

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved