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About SmithOnStocks - Investment Theses |
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The goal of this website is to provide balanced information that will help investors make good investment decisions. I will offer my own investment views and hopefully they will be of value. However, I would not advise anyone to make an investment based just on what SmithOnStocks believes. Find other sources and do your own research.
For SmithOnStocks, the fundamental prospects for a company are the essential starting point in investing. Without understanding the issues that are critical to the success or failure of a business, I don’t see how intelligent investment decisions can be made. The biotechnology and pharmaceutical companies on which I focus are product driven. This means that I spend considerable effort on new and in-line products, their clinical development plans and how they may fit into their markets.
There are several checkpoints for analyzing a drug. It begins with understanding the biological target, what the drug does to that target and what kind of response follows. No less critical is the clinical development plan. Great skill is required to design and execute clinical trials. Good drugs can be significantly delayed and investments damaged by faulty clinical trial design or execution. Also of great importance is the analysis of the market(s) in which the drug will compete, the economic and political factors that drive the growth and size of the market and the drug’s potential role within the market.
I look at valuation measures, but I think that there is a limitation to their use. One of the major flaws is that they are dependent on projections and it is very hard to project the future. Even with the large pharmaceutical firms that have highly diversified, global operations there can be significant earnings surprises. I consider P/E ratios, dividend yields, enterprise value to sales, etc. to be tools of the investment equation, but not sufficient in and of themselves to reach good conclusions. Seldom do I make a decision primarily on the basis of valuation. It has been my experience that stocks that look cheap on a valuation measure can get a lot cheaper. Similarly, expensive stocks can become more expensive.
I view technical analysis with some caution. At its essence, technical analysis is focused on momentum and while this adds value in up or down stock trends; it can result in significant errors at inflection points. There is always information in stock prices and their movements so I don’t want to give the impression that I ignore technical research, I just give it limited weight.
I do not try to call short term moves in the market primarily because I can’t do it. I am not alone in this. I believe that most market participants share this inability, at least the ones that I have known professionally and those that I watch on business news programs. I have the general view that as long as the US and world economies continue to grow, the trend of global markets is up. There may be fits and starts, surges and corrections, but the trend is up.
So I have listed some of the issues that I attempt to assess but how does this lead to an investment decision? I believe that each stock is influenced by countless investors and that the balance of positives and negatives results in a consensus view. I try to understand the key factors that shape this consensus and look for issues that can change it. For the universe of companies that I deal with, this is often related to a changed product outlook, but there are innumerable other factors that can arise. In my investment judgments the overwhelming factor that drives my thinking is trying to determine the consensus and then identifying factors that can change it. The greater the change, the greater the potential stock move.
I want to point out to potential subscribers that I will make wrong calls. Making money requires investment courage and acting before things become clear. If one waits for something to occur before acting, it is usually the case that the market has already incorporated that event into its consensus view and there is no opportunity.
Recognizing that I will make mistakes, I try to mitigate them. One of the disciplines I employ is trying to recognize things that can go right and what can go wrong. In any investment, there are a number of reasons to be positive and a number to be negative. Hence, when I am positive on an investment, I try to continue to understand and respect negatives in the story. In addition, I try to listen and learn from others. Seldom, if ever, can one person really understand everything there is to know about an investment. One of my major goals with this site is to have it become a forum for diverse points of view.
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