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Helical Portfolio Q1 2014 Changes and Performance

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April 06, 2014 – Comments (1) | RELATED TICKERS: GSK , BAX , MCK

The Helical Portfolio, focused entirely on the healthcare sector, is now 3-1/4 years old.  It was worth  $50,173.96 when it started and has performed admirably over the past few years.  I reported just twice on the portfolio during the past quarter.   I commented twice in my annual update (part 1 and part 2) and then again when the portfolio achieved its first doubling (hopefully with more to come).  It has pulled back a bit since I reported the doubling (what a surprise – LOL), but still performed quite well in the quarter.  I’ll first discuss the number of changes I made before commenting more on performance metrics.

Portfolio Changes

There were a number of transactions in the portfolio.  Short term hindsight is that some were perhaps questionably timed, but .. I’m not investing for the short term.  Still, I do have a ‘reevaluate trigger’ when my portfolio loses 6% off an ‘end of month’ high, and while I am not there yet, I am approaching it.

There were 3* buys and 4* sales in the quarter.  The sales were all of Baxter, some McKesson, some ICON plc, and some Wellpoint.  The buys were both new additions to the portfolio, GlaxoSmithKline and the return of Medtronic.  Overall, I looked to increase the cash position of the portfolio, and modestly adjust the risk weighting, taking on more net high risk. 

The first buy was 100 sh Medtronic for $5,738.99  on 1/27 (NYSE:MDT).  Medtronic is the largest of the medical device companies (split up Abbott is close).  The company seemed to stall earlier in the decade, or at least the share price did, which is a tendancy to watch out for with large companies.  The diminishment of the stenting market had many of the larger players struggling over the past few years.  More recent performance may indicate that the company is pulling out of that stall.  It isn’t the cheapest its been on many self comparative (price per) metrics, but I’m encouraged that revenue growth (and the dividend) is again increasing.  I had sold MDT out of the Helical Portfolio in September or 2011, on concerns over Europe paying its medical bills.  That was short sighted as the company has performed well since then.  The end of January had the shares dropping in price on the disappointing result of a renal device study, which seemed like a rare opportunity to get back in to this ‘foundation-type’ holding.  I consider Medtronic to be low risk, and should perhaps be more patient with my low risk core companies.

I also consider both Baxter and GSK to be low risk equities.  GSK has been troubled a bit of late.  For one, it became the poster boy for a China marketing scandal, which seemed to entwine all healthcare operators (non-Chinese ones anyway).   I’ve long admired CEO Witty and consider him the best of the big pharma class (entirely subjective).  GSK ended 2013 with the most ‘new drug approvals’ of any pharmas.  JNJ had that distinction in 2012, and their pharma division has driven their growth for the past couple of years now (Synthes acquisition aside).  The new 2013 drugs are not all created equal and not all the new GSK therapeutics are expected to be blockbusters, still a ‘fresh’ revenue stream is a great thing to see in big pharma, and GSKs is as fresh as they come.

I considered GSK as a replacement for Baxter.  On 3/18/14 I bought an initial position of 70 sh GSK for $3,845.80 (NYSE:GSK) and sold my 100 sh or Baxter for $6,690.15 (NYSE:BAX). Baxter is a solid company, but has lacked momentum and there are questions as to the sustainability of its pharmaceutical revenues.  When I bought, it was with the intention to sell on value (before now and with value realized ideally), and not make Baxter a core holding.  GSK is more a 'core' low risk holding.  One potential value that some had noted as inherent in Baxter was ‘breakup value’.  I had decided that this wasn’t enough to hold it for.  Of course shortly after I did sell,, the shares popped on the announcement to split the company into two separate entities (but not for a long time yet).  Oh well, these things happen.

While on the subject of ‘bad timing’ let me segue into my other buy this quarter.  Also on 3/18/14 I bought an initial stake of 10 sh Biogen for $3,537.60 (Nasdaq: BIIB).    I tend to look at the PharmExec industry audit as a good place to find well performing pharmas, which is part of why I both own and added to NVO in the past. I noted back in October that I’d been considering Biogen as a Helical Portfolio addition, a regular top performer in the audit (also Roche, but opted for GSK instead).  I watched the stock continue to do well and not give what I considered a good buying opportunity (based a bit on moving averages).  And, well … I guess I got impatient, at least for an entry position.  Due in part to expensive price-per metrics and lack of an opportunistic price, I considered Biogen a high risk equity.  I was right, as Biogen, and its peer group all fell substantially on March 20. 

The reason was another perennial top performer in the PharmExec audit, Gilead.  Gilead is a great company, but I’d always been wary that the drugs it produced would always be targets for pricing complaints, so I’ve never owned it (sadly).  While I expected price pressure to manifest primarily in the HIV franchise products, it came instead with the recently approved Hep-C combo Solvaldi, and came hard in the form of a letter from Henry Waxman.  This spooked the entire industry, affecting most of the mid-tier pharmas with expensive niche products, including Biogen.  As Herper points out in this Forbes commentary, the bluster may not be able to truly change pricing for Solvaldi or other therapeutics, all of which have long been under pressure from reimbursers.  So, my timing on the Biogen buy may have been poor in the short-term, but I now am considering whether to add (either more Biogen or some Gilead).

The other sales were simply trimming some of my larger positions in mid-risk holdings.  I sold on 3/18/14 some of each of ICON plc (Nasdaq: ICLR) , McKesson (NYSE: MCK), and Wellpoint (NYSE: WLP). 

Company             Sold                      Quantity Remaining

ICLR  40sh           $1,952.95                 $7,608.00 –7.4% of port (3/31/14)

MCK 15sh           $2,733.88                 $6,179.95  – 6.0% of port

WLP  20sh           $1,920.75                 $7,964.00 –7.8% of port

McKesson continues to attempt to disrupt healthcare with its logistic experience, but has struggled a bit to execute on that, and is expensive as well.  I am a bit more comfortable holding Cardinal right now, though believe the greater potential is in McKesson (I like ABC as well honestly).  I have been slowly culling ICON for quite some time.  I think it is still a nice fit but also that the big growth is likely behind it, so I’m content to have it under 10% of my portfolio.  I still like Wellpoint as well, but we keep delaying ACA provisions which should help the company, so I’m not inclined to overweight it, and it may be generously weighted at 7.8% of port.

Risk Weights

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 was cash.  I noted that I have long struggled to buy into risk, but still target ~1/3 in each tier.  The adjustments made in the first quarter of 2014 bring the holding to as close to target as I have been in the past 3 years, i.e. 27.5% in high, 38% in medium, and 34.5% in low risk holdings.  Cash is just over 17%, and I’ll be adding some in April, so I’m well prepared for some of the opportunistic pricing that may be coming present in the sector and market (patience).  I’d consider adding to GSK, GHDX, or Biogen (or adding Gilead).  I was also teased to buy back into Health Care REIT and Mindray in the quarter, but didn’t quite get my price on the former (should have nibbled) and am not yet ready on the latter. 

Performance

The portfolio increased 6.4% in the first quarter, despite my short term fumbles.  I’m quite pleased with that, and continue to expect 2014 to be a modest year (broken record on that front).  The Helical Portfolio ended Q1 2014 at $99,876.44.  The end of month high was the close of February at $102,720.58 (back when I still had a double), so I target ‘reevaluation’ at ~$96,500 should I drop to that level, which won’t be likely since I’ll be putting cash into the account.  Cash on hand was 17.1% of the portfolio at $17,077.79.  The performance through 39 months is portfolio growth of 99.1%, with a  CAGR of 23.6% and IRR of 18.5%.  The IRR is way ahead of the target 8-10% I’d set as a goal for this account (this reminder makes falls from recent highs easy to shrug).  This compares with the performance of a comparable investment in the S&P500 via SPY with dividend reinvestment(#) of 84.6% total return, CAGR of 20.7% and IRR of 15.5%.  To date I have outperformed SPY by 14.4% in total return, 2.9% in CAGR and 3.0% in IRR – which is nice and encouraging, but not nearly as important at the outperformance of the 8-10% goal.

Ralph

Helical Investor

* This blog is supposed to be a notebooking exercise that I’m comfortable making public (in a low profile way).  So … when I do something embarrassingly dimwitted I suppose I should still comment on it for myself, even though I’d rather not in this space.  Technically, I had 4 buys and 5 sales this quarter, not the 3 and 4 I mentioned above.  Why?  Well, I got distracted and entered the symbol for Bio-rad (BIO) when I wanted to buy Biogen (BIIB).  I corrected this, but it did cost me $12.59 in unintended ‘day trading’ commissions.  I know – dumb like a clam.  Ironically, if I hadn’t noticed I would have saved myself money.

# The comparison to SPY is imperfect.  I track my portfolio with the close price on 3/31/14, but I track SPY with the dividend reinvested at the open price on the first day of the next quarter (4/1/2014 open). 

1 Comments – Post Your Own

#1) On April 06, 2014 at 10:37 PM, XMFWhatsmyoption (< 20) wrote:

Great stuff Ralph.

I hope you're as healthy as your portfolio and as happy as can be.

Best,
Dean 

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