Investment Activity Review-October 2014

October has historically been a bad month for stock markets. Some of the great crashes in history have occurred in October. For about 10 days in the 2014, it looked like history was repeating. A perfect storm of geopolitical and economic forces appeared to be coming together. The five year run on stock prices has been driven by extraordinary levels of money printing by global central banks. It appeared that after a long time, investors were looking under the hood of these stocks to see how economic fundamentals were working and they did not like what they saw. It appeared that correction everyone was waiting for was now in play. 

For myself, when stocks pull back violently like they did in October, it is my signal to go shopping. I always have my list of favourite companies and I will start going through them to see if indeed an opportunity is there to pick something up on the cheap. Pullbacks are also opportunities to add to existing positions to lower the purchase costs. The one behaviour I have definitely learned over the years is to not panic and sell out my portfolios. It's the worst time. Stock market swoons are a time to play offence not to hang back and play zone defence. 

At the onset of the correction I made a couple of transactions. One was a new position and one was an addition to an existing position.

ADDED to position in Whole Foods Market (Ticker: WFM)

Not much changed in the operations of the company, yet the stock price fell into the $37-38 range during the correction which was a level I was looking to buy some more shares to lower my average cost. With the latest purchase my adjusted cost base fell from $43 to $41. I still think the company is solid and generating meaningful economic profit. Despite analysts's hand wringing that additional competitors coming into the premium grocery space, I still think that Whole Foods is the best of breed company that is selling at a discount. Management has acknowledged that they didn't take the new comers seriously and are more committed to establishing that they are the leading high end grocer. The balance sheet is still solid with minimal debt which I always like to see. The stock is still out of favour by the Smart Money People, so and semblance of upside could make the stock pop. 

OPENED position in Gilead Sciences (Ticker: GILD)

One area I always have tried to make sure I've got exposure is in the health care space. The main reasons are long term the demographics are skewing towards greater demand for health care services and products. Unfortunately I've had mixed results with investing in the health care stocks especially pharmaceutical and biotechnology companies. The problem is that these type of companies invest a lot of money in research and development and the process for getting the market is riddled with regulation and process, which is understandable. When a company finally gets a produce to market, it can literally be like winning a lottery. The problem is that the patent behind a drug has a limited lifespan and when the patent expires then it is open season for other companies to sell a cheaper, generic version which will limit the future profitability of the inventing company. I've dipped my toes in several pharma companies only to get burned when patent issues and lack of a pipeline to replace the expiring drug takes the stock down. 

Right now, I don't have any health related companies in my portfolios. My search for health related stocks turned up a company that has had a very good run in the past few years. Gilead has almost doubled in price the past few years. After looking at valuations the stock despite the run up still appears to be undervalued, with an intrinsic value coming in at at $140 range. The company has established itself at the leading maker of respiratory drugs. It's bread and butter drug is Sovaldi which is used to treat Hepatitis C. Recently it received FDA approval to sell another Hep C drug, Harvoni which many observers say could be another huge drug for Gilead. The company also has some additional drugs that are used for HIV/AIDS that has shown promise as well. It appears that the company has been able to develop a pipeline of medications that will provide a very predictable and stable cash flows well into the future. 

I had been watching the stock since late summer and these stock had been trading as high as $120. In the October correction, the stock dropped to as low as $98/share and that is when I decided to begin building a position. Shortly after the company reported solid revenues but as usual the analysts were not impressed with double digit profit and revenue growth. Always wanting more. The stock got taken down but shortly bounced back to as high as $117. The thing with investing in pharma stocks is that you need to be ready to accept rapid price moves in both directions. 

Correction or hiccup?

I was ready to pull the trigger on some other opportunities, but as fast as you can say "correction" everything turned around toward the end of the month. The Federal Reserve pretty much panicked and started thinking out loud that future interest rate hikes could be delayed or worse that Quantitative Easing could be reborn. The market which has been become addicted to cheap money got its fix and stock prices came back up. To add to the madness Japan entered the fray and announced essentially it is going all in on its own quantitative easing program and will be inviting heavily in Japanese stocks which again the stock market embraced. It appears the big downturn I was expecting was quite short lived. Until interest rates tangibly move up, the trend for stock prices to keep trending up is still in play. The stock market is really a game of musical chairs in that we're all guessing when the music will stop or in this case when interest rates will start to go up. Even though the Federal Reserve has ended its money printing program, there is still almost $3 TRILLION dollars that has to find a home and it is likely to find its way back into stocks in the short to medium term. Factoring this in, I decided to hold off on adding new positions and basically ride out my existing positions of which includes a significant short position on the S&P 500 index.