Trade Notes: Exact Sciences, China Agritech
March 07, 2011
– Comments (5) |
RELATED TICKERS: EXAS
, CAGC.PK.DL
I have added a section on my website called "Trade Notes." You must be registered to see these notes. They are simple and meant as brief explanations for clients and the very interested. Here is the first set of notes:
This week we added to our position in Exact Sciences for accounts holding stock. Our basic view of Exact is that they have a rare opportunity to dominate a large market in health care. My 3 to 5 year price target is $24+ based upon the massive size of the colorectal cancer screening market.
The founder of Exact also founded a company that specialized in the pap smear test, a similarly sized market to that of colorectal cancer. That company was eventually bought out at a substantial premium to what early investors paid for their positions.
The management of Exact is experienced with the FDA process and has taken another company to the point of being bought out at a substantial premium. Recently, management enacted a poison pill provision which can protect shareholders from a hostile takeover at low prices, in essence ensuring more control over any potential buyout price.
Exact is Robert W. Baird's #1 small cap pick and Baird handled a secondary offering earlier this year where it placed many shares with their clients at $6 a share. Exact has been my #1 pick for several years now since it was priced in the $1s.
Of note, because Exact is a large holding for us, and is down the past four months, many accounts have fallen over that time period partially as a result of Exact's performance.
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Over the past few weeks I have been accumulating a position in China Agritech . The company is a Chinese fertilizer company that has come under heavy attack by short sellers and internet bloggers. The company had been showing weakness due to the earthquake and floods in China disrupting sales for a year.
Carlyle, the world's largest private equity firm sits on the board of the company and is a large investor. We are down while accumulating our position, however the share price appears to have stablized. If that is so, that the share price has stablized, then we have accumulated a position very near the cyclical bottom.
My 3 to 5 year price target is $30 based upon a return to sales growth exhibited the past few years.
One of our strategies has been to sell put options. An example would be the "March $8 Put" that we sold:
We received a premium (somebody paid us) of $1.25 per share and in return we are obligated through March 18th to buy shares of China Agritech (CAGC) at $8 per share. If the share price is under $8 on March 18th we will end up buying the stock. Our cost will be $8 minus the $1.25 that we received. So, unless the stock is under $6.75 at the time, we will be ahead.
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You may see upcoming notes at http://kirkspano.com/content/category/8/33/72/
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