Lose 32% of money on popular stocks
Would you like to lose 32 percent of your money every year?
Then bet on wildly popular stocks — ones that sell for 100 times the company's revenue or more.
I have published nine previous columns on this subject (2000 through 2006, 2012 and 2013). Eight of my nine warning lists have, as I expected, produced returns that lagged behind the Standard & Poor's 500 Index. Seven of the lists have shown absolute declines.
Combining all nine lists, the average decline was 32.65 percent.
Why do people invest in such stocks? They can't resist the gleaming lure of a company with a promising new product — or the hope of one.
Many companies whose stocks sell for 100 times revenue or more are biotech outfits, and a significant number of them are working on cancer drugs.
No one wants a cure for cancer more than I do. My brother and mother both died of it. But stocks should be evaluated mainly on what a company has done, not what it hopes to do.
A mighty thud
My latest list of stocks selling at 100 times revenue or more was published on Feb. 19, 2013. Here are the results:
• Archillion Pharmaceuticals Inc. (ACHN) was down 63.98 percent.
• Ariad Pharmaceuticals Inc. (ARIA) fell 58.85 percent
• Virnetx Holding Corp. (VHC) lost 49.08 percent.
• Lexicon Pharmaceuticals Inc. (LXRX) declined 11.44 percent.
• Ziopharm Oncology (ZIOP) slipped 6.88 percent.
The list as a whole was down 38.05 percent,in a year when stocks were buoyant.
Four of the five stocks highlighted a year ago were biotechs, and three of them were active in research on anti-cancer drugs. Some of them may prove to be good companies. But in my judgment, any stock selling for 100 times revenue has gotten “ahead of itself,” as the market expression goes.
As one example of the kind of thing that can go wrong, consider Ariad Pharmaceuticals. Its flagship drug Iclusig, for treatment of leukemia, was found to increase the risk of blood clots. The drug is still on the market (with increased warnings), but investor enthusiasm has deflated.
This year's candidates
Here are five stocks that sell for more than 100 times earnings. For most investors, this should be considered a list of stocks to avoid. For short sellers, who bet on selected stocks to decline, this might be a candidates list.
Intercept Pharmaceuticals (ICPT): This 12-year old biotech firm based in New York City is developing drugs to combat liver diseases. It has no products on the market yet, but has several products in clinical trials, including one in phase III trials for cirrhosis of the liver.
It also has a drug that shows promise in treating hepatitis that is not caused by alcoholism. Both drugs have large potential markets.
Intercept had revenue of $2.4 million last year, and a market value of $6.7 billion, for a price/revenue ratio of 4,370. That doesn't stop analysts from liking it. All seven analysts who follow the stock rate it a “buy.”
To justify a $6.7 billion market value, you have to assume that the company will achieve about $3 billion in sales reasonably soon.
But these things take time. Microsoft, one of history's most successful companies, reached $3 billion in sales seven years after it introduced its software suite Microsoft Works.
SunGame Corp. (SGMZ): Based in Las Vegas, SunGame describes itself as a “development-stage company engaged in the process of establishing a three-dimensional, virtual world community.” I believe that means that it is developing multi-user online games in 3-D.
With a market value of $5.69 billion and sales last year of $23,000, SunGame has the highest price/sales ratio that I ever recall seeing, more than 100,000.
In my opinion, the company's press releases have a boastful tone, which I view as a bad sign. The stock is listed on the OTC Bulletin Board and is thinly traded. It may be hard to sell if you need to.
Gawk Inc. (GAWK): Gawk of New Orleans is developing a website that will show proprietary full-length films and TV series. If there was ever an area with heavy competition, this is it. Yet this fledgling outfit, with revenue of $23,000 last year, has a market value of $2.4 billion.
Lexicon Pharmaceuticals: This biotech company based in The Woodlands, Texas, still sells for 942 times revenue after its moderate decline last year.
Finally, Ubiquity Broadcasting Corp. (UBIQ) of Irvine, Calif., fetches about 10,000 times revenue.
One of its projects is a feature film set aboard the Queen Mary. Filming is to begin this spring.
I wish these companies success. If they get it, they may be worth their current prices in a few years.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Marte’s bat, Worley’s arm show improvement in Pirates win
- Stakes raised for Pitt spring game
- Penguins push to sell playoff hockey tickets
- Knoch’s Geist sets shot put, discus records at Butler Invitational
- Greensburg high school roundup: Norwin edges section rival Penn-Trafford
- North Hills-area family continues helping out-of-town patients
- Penguins stars Crosby, Malkin enduring playoff slump
- Steelers visit with Arizona State receiver Strong, claim long snapper
- Mackey: For Pens’ Winnik, playing with Crosby an ongoing process
- Penguins’ 4th line a bright spot in Game 1 loss
- Sanchez odd man out with Pirates recalling Stewart