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TMFHelical (98.77)

Helical Portfolio 3rd Annual Update - Part 1

Recs

9

January 12, 2014 – Comments (4) | RELATED TICKERS: WLP , MCK , ICLR

 

It was just over 3 years ago that I dubbed my Roth IRA, then worth $50,173.96, as The Helical Portfolio and focused it entirely on the healthcare sector.  It has been a fun, and so far profitable exercise, and one I intend to continue.

 

My Background

I work for a small (near virtual) pharmaceutical firm with a drug in clinical development.  Prior to that, I worked for the ‘technology’ side of biotechnology, helping design research tools at what was then Applied Biosystems.  I read quite a lot of healthcare news and information, and wanted to appreciate whether that gave me an advantage investing in the sector.  For a short time starting on 2006, I wrote freelance just a few articles for The Motley Fool, again mostly focused on healthcare, then gravitated over to a support role as a ‘Coverage Fool’ assisting on some newsletter subscriber boards.  CAPS started beta testing in 2006, and since I was writing on healthcare, I thought I would use CAPS to demonstrate (to myself?) that the opinions I was expressing did have value.   My CAPS selections have always been healthcare related.  In 2010, the Motely Fool introduced its ‘Rising Star Portfolios’, presumably to give their newer employees and training program a track record (I don’t know its actual goals).  I thought this was a good idea, and though I am not a Rising Star, I embraced the consideration of using a portfolio to demonstrate my acumen (or not).  Thus was born the Helical Portfolio.

 

Framing and Performance to Date

The past 3 years have been a good time to be an equity investor.  The winds have been pretty steadily on our backs.  Still, the recency of the 2008-9 market collapse was forefront in everyone’s mind at the start of 2011, and I believe continues to bias risk assessment to this day.  I consider RISK to be more a perspective than a measure, but still a very important assessment to consider.  I favor a behavioral portfolio framework for construction of the Helical Portfolio, and strive for, but rarely attain, a blend of ~ 1/3 in each tier of risk; high, medium, and low.  The Helical Portfolio ended 2013 with a considered/perceived blend of 23.6% in high, 43.5% in medium, and 32.8% in low risk holdings.  In the low risk tier, 17.8% of the portfolio is cash.  I consider the risk of each holding, with the main consideration being business risk and keep ‘high risk’ holdings below 8% of the port, ‘mid risk’ below 14%, and ‘low risk’ below 20% (except cash).  Looking at end of quarter cash balances, I’ve held on average 24.2% cash over the past 3 years, which speaks to my continued discomfort with the level of the broad market and preference for the optionality that a cash balance provides.  A guideline of the portfolio continues to be reassessment(*) when the portfolio loses 6% overall, or 2% to any one holding.  The goal of the portfolio is to provide at least an 8-10% CAGR over time, which may seem modest after these past 3 years, but can be tricky at times.

 

Performance these past 3 years has been well ahead of expectations.  The Helical Portfolio ended 2013 at $93,830.66.  All dividends were collected as cash and in 2013 totaled $707.19.  Cash on hand was 17.8% of the portfolio at $16,686.66.  The 2013 annual performance was a +28.4% IRR.  This incorporates the cash ($5000) added on 4/15/2013, and compares to a +29.3% IRR that would have been attained with a comparable investment in the S&P500 via SPY with dividend reinvestment(#).  So, I modestly underperformed the market in 2013.  Keeping score of comparable performance(#) on an annual basis.

 

Year        Helical Port IRR          SPY IRR

2011            12.2%                      2.9%

2012            11.8%                      15.7%

2013            28.4%                      29.3%

I have underperformed 2 of three years, but was well ahead of my target in each of those years.  Also, I outperformed early, which provides a clear benefit.  The 3 year growth of the Helical Portfolio has been +87% with a CAGR of 23.2% and an IRR of 17.6%.  For SPY with dividends reinvested, the comparable would be growth of 80.2%, CAGR of 21.6%, and IRR of 16%.  I am quite happy with this performance, particularly in having achieved it while often having a solid cash cushion.  $10,000 has been added to the portfolio over this timeframe, and is why the CAGR is higher than the IRR.

 

The Portfolio and Current Opinion on Holdings

The composition of the Helical Portfolio is as follows (oldest to newest, some were holdings prior to the portfolio becoming ‘branded’):

 

CVS (low risk), first bought 7/2/2010, sold in entirety on 1/31/2011, then rebought on 4/7/2011.  The EOY (end of year) value was $7157.00 (7.6% of port).  IRR of the CVS holding has been 31.2% overall and 30.7% since the 4/2011 repurchase.

 

I continue to like consumer facing purveyors of health, and the increased discussion of healthcare and services should benefit CVS.  I think one trend (though slow to play out) that will result from the ACA is more incentive for doctors to insure pharmaceutical compliance, which favors drug volume (good for McKesson and CVS’s business units.  I like the walk-in clinics as traffic and service drivers.  CVS profitability is improving of late, but it is getting more expensive as well.  I think the business is increasingly low risk, but the price may be rich.  No inclination to add or cut at this time.

 

Genomic Health (GHDX), (high risk) first bought 10/5/2010, sold in entirety on 6/13/2011, rebought on 12/15/2011, and reduced the holding on 6/13/2012.  The EOY value was $4,683.20 (5.0% of the port).  IRR of the GHDX holding has been 47.1% overall but just 9.6% since rebuying near the end of 2011.

 

I had early success with Genomic Health and continue to appreciate their focus on diagnostics that add value to health reimbursers.  Competition for their product lines, of which there are few, is increasing. The newer prostate test should drive the company growth in the coming year.  I may add if the prostate test sees rapid adoption, or sell if price pressures from competition become an issue.

 

Cardinal Health (CAH), (medium risk), first bought 11/2/2010, sold in entirety on 6/13/2011, rebought on 12/12/2011.  The EOY value was $6,681 (7.1% of port).  IRR of the CAH holding has been 32% overall and 27.6% since rebuying near the end of 2011.

 

I’m likely to always favor dividend growth plays.  My opinion of drug distributors continues to be favorable.  I consider them to be showing classic disruptive innovation in healthcare i.e. using their logistic experience from running a low margin, unappreciated business (drug distribution) and creating new markets.  McKesson is more disruptive IMO, but Cardinal has potential as well. ACA should help incentivize drug compliance and usage in general has demographics and increasing generics favoring it.  Which to own is a struggle though, and perhaps Cardinal will be swapped for AmerisourceBergen one day, as I like some moves they have made of late (World Courier acquisition) that may give them a leg up on global expansion.

 

Athenahealth (ATHN) (high risk), first bought on 2/24/2011, sold in entirety on 11/11/2011, rebought on 7/29/2013 and added on 12/11/2013.  I did not detail in December that the addition was 20 shares for $2642.60, bringing the total for 50 sh. The EOY value was $6,725 (7.2% of port).  IRR of the ATHN holding has been 39.3% overall and 55.7% since rebuying in July 2013 (less than 1 year period).

 

Athenahealth is a tough company to like.  Generous compensation, a pending CEO leave, large non-core real estate transaction, etc. make me cringe.  But I still think this is the right company with the right products at the right time in regards to the mandate for electronic health records.  I was content not to own when the first incentive wave passed and the second was delayed, but as we approach the more strenuous criteria for HER, and later penalties for not having them, ATHN should continue to grow.  I’d like to see a couple more large group contracts in the coming year to affirm Athena’s ability to serve larger client bases.

 

Almost Family (AFAM) (medium risk), first bought in August of 2011, added in October 2011, and sold half in December 2013. The EOY value was $3,233 (3.4% of port).  IRR of the AFAM holding has been 31.0% .  The December 11, 2013 sale was 100 sh for $3,002.94, leaving me with 100 sh.

 

Almost Family operates in the difficult business of home health.  They do not have the ability to set the prices for their serves, and thus have struggled with reimbursement rate cuts the past few years.  The company grows via value disciplined acquisition.  After a few years sitting with cast on the balance sheet waiting for prices to suit them, AFAM finally made a large acquisition near the close of the year, and the stock popped from it.  Patience paid off.  I will continue to own as the demographics and trends in healthcare favor these services, but the reimbursement landscape should continue to be tough.  When AFAM again builds up some cash, I expect I’ll add to the holding.  I expect this to be a couple years out.

 

ICON plc (ICLR) (medium risk), first bought in October 2011, added in December 2011, reduced position in May 2013 (50 sh), and again in October 2013 (50 sh).  The EOY value was $8,084.00 (8.6% of port).  IRR of the ICLR holding has been 54.7%.

 

This clinical contract research organization (CRO) continues to perform.  I have reduced it mostly for portfolio weighting reasons.  Big pharma has a large efficiency problem in developing new drugs, and CROs help with costs.  The adoption of CROs phase is largely complete, so these companies should do well from here depending on biotech funding and pharma spend.  Both are healthy right now.  Still this company requires more vigilance than others in my opinion.  Some other CROs (Parexel) have had mis-steps which if temporary may justify a switch from ICON.  Sector big dog Quintiles is now public as well (will PPDI come back?), so in a sector sell-off to value, that may be the better choice one day i.e. I own ICON because I like the sector, but don’t think there is a lot special about this particular company.

 

Wellpoint (WLP) (medium risk), first bought in December 2011, sold some in April 2012, bought more in June 2012, and sold in entirety in August 2012Rebought in February of 2013 and added in June 2013.  The EOY value was $9,239 (9.8 % of port, largest holding).  IRR of the WLP holding has been 20.2% overall and 46.3% since rebuying in July 2013 (less than 1 year period).

 

My initial foray into the health insurers was premature and cost me.  I had long thought that post ACA passing, 2013 was the time to consider, but got teased by strong performance prior to then.  I believe (may be wrong) that over the long haul, exchanges will how most find insurance (employer reimbursed for many), and like that Wellpoint has a consumer facing new CEO, and has a strong presence on many major state exchanges.  2014 may be tough, as the rollout of exchanges has been – problematic (to be kind), so I may reduce if there is weakness and look for a reentry.  Not sure the near term questions justify this being my largest holding, but certainly a position is warranted.

 

McKesson (MCK) (medium risk), Bought in October of 2012. The EOY value was $8,070 (8.6% of port).  IRR of the MCK holding has been 62.3% .

 

Much to enjoy about the McKesson holding.  While Cardinal was my fist purchase of the drug distributors, I like all 3 majors.  While Cardinal was more of a value play originally, McKesson has shown it has the most disruptive potential.  Seems pricey right now, but I’ll hold steady unless there is business weakness.

 

Novo Nordsk (NVO) (medium risk), First bought in February of 2013 and added in October 2013.  The EOY value was $5,542.80 (5.9% of port).  IRR of the NVO holding is not meaningful as I have held this less than 1 year, and has been 20.8% to EOY.

 

I don’t favor the big pharma majors, but do like the second tier niche pharmas like Novartis.  This is where value creation has been the last few years.  I favor the view of the Pharmaceutical Executive magazine industry audit, which has shown NVO to be one of the better value creators over the past few years.  I may add on weakness, and should also better consider adding other second tier companies highlighted in this audit.

 

Baxter (BAX) (low risk), First bought in May of 2013 and added in September 2013.  The EOY value was $6,955 (6.3% of port).  IRR of the BAX holding is not meaningful as I have held this less than 1 year, and has been 6.3% to EOY.

 

Baxter was bought as a value play, with breakup and acquisition potential, and as a company that should benefit from increased hospital usage with the expansion of health coverage.  It is a solid but occasionally volatile company, with a decent and growing dividend.  But honestly conviction here isn’t all that high.  Recent weakness in other past ‘low risk’ holding HCN and strength in past holding Medtronic may have me juggle my ‘low risk’ grouping, which has long been dominated by cash.

 

Healthnet (HNT) (high risk), Bought in August 2013.  The EOY value was $2967 (3.2% of port).  IRR of the HNT holding is not meaningful as I have held this less than 1 year, and has been -4.9% to EOY.

 

While not perfect, Healthnet is a play on my thesis that insurance exchanges will become increasingly important over the years.  I know of no disruptive pure play with an exchange based business model, but HNT plays in some of the largest states (CA), has an exchange business, and is of a size where this model could indeed come to dominate the company.  Insurance is tough, and this should be watched closely, especially for potential disrupters.  For now, this is considered high risk, and weighting will be kept modest.

 

Biocryst (BCRX) (high risk), and Mirati (MRTX) (high risk), Bought BCRX at the end of August 2013 and MRTX in December 2013 (100 sh for $1682).   The EOY value was $2280  (2.4% of port) for BCRX and 1663 (1.8% of port) for MRTX.  IRR of the both holding is not meaningful as I have held this less than 1 year, and has been 53.5% and -18.7% respectively to EOY.

 

I lump these together because they are both primarily development stage pharmaceutical enterprises.  They will likely use dilutive financing to move programs forward.  Biocryst has a flu/antiviral focus and Mirati is ‘yet another’ kinase inhibitor oncology program.  Both companies have recent initial purchases by insiders Julian and Felix Baker, and are thus ‘jockey stocks’ based on the impressive performance of these individuals.  Selecting development stage biotech is difficult, but it should have a presence in a healthcare portfolio.  I’m content to coattail on those who have done so successfully in the past.  I expect to keep these positions small initially, so that failure is only a small concern, but will allow them to grow (to ~8%) if they are inclined to do so.  Buy and try to ignore for a long time is the mantra for development stage firms.

 

Extendicare (EXETF) ) (high risk), Bought at the end August 2013, and added in October 2013.  The EOY value was $2967 (3.2% of port).  IRR of the EXETF holding is not meaningful as I have held this less than 1 year, and has been 4.1% to EOY.

 

Extendicare has a stated intent to split the US and Canadian businesses, and the investment thesis is that this will unlock value.  The initial intention was to do this by year end, but that has been pushed forward.  The catalyst is present, but intention and ability to execute at value are unclear, thus the high risk designation.  I don’t expect to own this long term and will be surprised if I hold it past June of the coming year.  This is pecial situation holding, with a time constraint (so option like in a manner).

 

Ralph

Helical Investor

 

* Reassessment does not indicate an automated activity, like a signal to buy or sell, but instead a prompt to capture my current thinking in writing, and perhaps act.  Action may be contrary as often as in trend.  I should have gain assessment triggers too, but do not yet.

 

# The comparison to SPY is imperfect.  I track my portfolio with the close price on 12/31 each year (and quarter), but I track SPY with the dividend reinvested at the open price on the first day of the next quarter (1/2/2014).  So I am comparing ‘end of year close’ to ‘end of year close’ for the Helical Portfolio, with ‘start of year open’ to ‘start of year open’ with SPY (with dividends reinvested).

4 Comments – Post Your Own

#1) On January 12, 2014 at 2:27 PM, TMFHelical (98.77) wrote:

Oh well, so much for bolding the company names.  I need an editor, and to pay more attention in preview.

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#2) On January 13, 2014 at 7:32 AM, AirForceFool (99.93) wrote:

Totally awesome. I don't follow healthcare as well as I should, but your dedication to tracking and updating is to be envied. Made some decent money on ENCY back in the day, and gave it all back on DNDN, but with longevity being what it is, and the general aging of the populace I may have to do more research. Most of my funds are currently tied up in real estate and silver... anyway, greatly appreciated the post. Chris

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#3) On January 13, 2014 at 10:48 AM, Mega (99.96) wrote:

Have you ever looked at GTS, dominant health insurer in Puerto Rico?

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#4) On January 13, 2014 at 11:04 AM, TMFHelical (98.77) wrote:

Mega,

 

I have not looked at GTS.  I would say that one lesson from MA exchanges, having been active for a number of years prior to the ACA, is that the smaller regional insurers thrived on exchanges.  

Ralph 

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