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Helical Portfolio Additions

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October 20, 2012 – Comments (0)

In the last months update I noted the Helical Portfolio was 44% cash and thus unbalanced to low risk.  I would like to guide this portfolio to an even spread of 1/3 low, medium, and high risk, but will deviate from that as conditions dictate, i.e. when I do deviate I note why.  While I do think the market is overbought and there is lots of concern that a correction may be coming, I don't think things are so concerning that nearly half the port in cash is justified.  Also, like most investors I am subject to behavioral quirks, and find it difficult to be overly patient in an market that has risen until recently.  So to pacify my brain and reduce cash, I have made a couple of modest additions to the portfolio.

First, I added West Pharmaceuticals (NYSE :WST).  This is a business I've long liked.  The company supports pharmacueticals as a component maker and research support.  It is best known for making the rubber seal piece (cap & closure) on injectable drug products.  It also supports development primarily with compatibility and stability testing (insure the rubber seal does not affect the active ingredient for example). With more and more drugs being biopharmaceutical and thus injectable, West is well positioned to benefit, and as a component maker is effectively indifferent to whether the drug is branded or generic.  Also, since the FDA requires validation of drug products for approval, which includes bottle, cap, active and inactive ingredients, label .... everything, changing any one component requires a lot more than just ordering from another supplier (FDA filings and copatibility testing), so the business is very sticky.  Capital expenditures over the past few years have focused on overseas manufacturing capability to serve the shift seen in drug manufacturing, and that is paying off now.

mentioned I was looking at WST in September.  This disabled me from buying it for a couple of day (Fool disclosure rules), and the stock moved up in that period (oh well).  Mid September when the stock was back on the 100d EMA was the better time to buy, and perhaps I should have been more patient here.  So, just a nibble with an intent to add on weakness.  I consider this a middle risk company.

Bought 10/12 WST 50 shares for $2,646.50 ($52.7899/sh + $7.00) - just under 4% of port.

The second addition was a dip into a familiar space, but with a different company.  I own drug distributor (middleman) Cardinal Health and have considered others in the space.  These are stable supply chain businesses, but low margin, and ones that may be able to use their logistic knowledge to better serve other aspects of the healthcare market.  The three major distributors are Cardinal, AmerisourceBergen, and McKesson.  Cardinal has underperformed its peer group over the past year.  They buy from the pharmaceutical companies and compete to supply drug store chains, hospital group pharmacy, etc. while also dealing with pharmacy benefit managers i.e. who is going to need what, where, how much and when.  Of the three, I like AmerisourceBergens recent merger with World Courier, a pharmaceutical shipping company with global reach (I've used them to ship refrigerated material to India), and also McKesson's efforts to get into physician groups (US Oncology) and provide electronic health record software & support (invasive logistics).  Despite my opinion that expansion of electronic medical records is slowing as those that sought the bonus payments (early adopters) are on board, but those who will wait until the penalty phase kicks in have yet to fully engage, it should be a driver in the future.  And, of those who provide EHR software and services, McKesson is the only one not overpriced due to the coupling of the low margin drug supply business.  A solid company and semi-stealth play (it does command a premium over the peer group) on EHR.

So I have added McKesson, and for now am also keeping Cardinal.  This too is considered a middle risk company, as it does trade above its peer group, likely for reasons (EHR) that may be seeing an adoption slowdown.  I should think about whether I still want to classify Cardinal as low risk as well.

Bought 10/12 MCK 50 shares for $4487.50 ($89.6099/sh + $7.00) - at ~ 6.5% of port. 

So, a little more money put to work.  Still need to dip my toes further into the higher risk pool, and still hesitant to do so. Considering some established biotech.  Still with > 33% in cash in the Helical Portfolio.

Ralph

Helical Investor 

 

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