Investors enthusiastic about biotech stocks

Andrew Leckey

December 09, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Now that's more like it.

Two of America's most accomplished investment letters, their portfolios performing anemically for much of 1992, have received a quick shot of adrenalin. Their model portfolios are rising and investors are enthusiastic.

"The past month we've been receiving investment money at three times the normal rate, pushing our assets under management to more than $100 million," said James Collins, editor of OTC Insight, whose model portfolio as tracked by the Hulbert Financial Digest was up 148 percent in 1991.

Total return of its portfolio of small company stocks, negative through September of this year, has turned positive and is heading steadily upward. HealthSource Inc. doubled in price.

"In the last month, biotech stocks revived and people are positive and excited again," added James McCamant, editor of the Medical Technology Stock Letter, whose portfolio the Hulbert Financial Digest says gained a dramatic 204 percent over the three-year period ended in June.

McCamant's aggressive portfolio of 10 medical technology stocks, down in the dumps four weeks ago, is now up 8 percent. Collagen Corp. gained $10 a share.

A belief small company stocks will prosper under Bill Clinton helped both newsletter portfolios. Assisting were surprisingly vibrant earnings of small firms. Furthermore, with billions of dollars in mutual fund money stashed in large cash positions through summer, fund managers were poised to invest.

In biotech stocks, an initial belief the Clinton presidency would hurt all medical stocks has been tempered. While some large medical firms may be pressured by a greater cost containment, it's unlikely to affect small firms much. Even price controls on drugs wouldn't hurt, experts believe, since prices of drugs are actually higher in countries which have control prices.

"We have another couple of years to go with small company stocks, even though there will be volatility the next six months, with declines of 3 to 4 percent some months," predicted Collins, who's buying stocks priced at 18 times earnings in companies which should have 25 percent annual growth rates. "The 'up' months will more than make up for 'down' months."

He expects a restrained economic stimulus program from Clinton. Little is expected in interest rate increases, since countries such as Germany are liable to cut rates.

"Volatility is still an issue with biotech stocks, but they're worth buying on their next price dip, perhaps in mid-December," advised McCamant, who believes 1992 will wind up modestly positive. "Next year will be good for biotech stocks, though not crazy like 1991 when every stock went up."

(The monthly OTC Insight, 1600 School St., Suite 105, Moraga, Calif. 94556, costs $225 annually. Medical Technology Stock Letter, P.O. Box 40460, Berkeley, Calif. 94704, costs $320 annually for 24 issues.)

From the OTC Insight portfolio, the stock of Cisco Systems, which increased in price from $42 to around $75, offers a high growth rate and return on equity in a quality manufacturer of computer network products. Value Health Inc., purchased at $22 and now around $40, sets up managed health care for employer plans. HealthSource, rising from $25 to around $50, is the most efficient HMO stock.

Standard Microsystems Corp., which Collins recently began acquiring, is a promising firm in semiconductors and circuits. Acclaim Entertainment, developer of video game cartridges, produces for Sega, Genesis and Nintendo. Designs Inc., which sells Levi Strauss clothing, is growing rapidly. Rally's Inc., a fast-food chain, should grow 30 percent.

From the Medical Technology Stock Letter portfolio, Collagen, which increased from $15 to around $24 a share, may see its Collagraft product for bone grafts approved by the Food & Drug Administration by year-end. Calgene Inc., up from $12 to $17, is a leading agricultural biotech firm featuring the "flavor saver" genetically engineered tomato. Biotechnology General reached agreement to market its human growth hormone in Europe.

ProCyte Corp., a company in wound-healing drugs, and Cytogen Corp., known for its radioactive-labeled antibody used in cancer detection, are other McCamant picks. Chiron Corp. is recognized for its blood-screening test.

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