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Reloading the Insider Matrix
By Michael Brush
February 16, 2006
As any investor can tell you, the purpose of a stop loss order is to set an
automatic trigger that gets you out of a stock without emotional drama when
it starts to sink – so your losses don’t multiply.
It’s simply too easy to trick yourself into staying with a losing position
that chips away at your balance daily – as you cling to hope.
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That’s why, as a rule, we dump positions in the Insiders Corner portfolio
whenever they decline 25%. No questions asked. So it hardly makes sense to
circle back now and reopen positions that have stopped out.
But I am going to do it anyway with two stocks that tanked in the past few
months and stopped out: Peregrine Pharmaceuticals (PPHM)
and Fossil (FOSL),
a retailer.
Peregrine Pharmaceuticals
We suggested Peregrine last summer at around $1.25 (http://www.investorideas.com/insiderscorner/Articles/Envelope_please.asp).
But then the stock drifted steadily lower to around 90 cents a share,
stopping out of our model portfolio.
The stock recently snapped back to life and surged to about $1.50,
apparently on exactly the kind of news flow we were expecting. This suggests
more upside -- because it’s easy to map out similar catalysts this year.
Besides, the potential for this company’s main compound in fighting many
common viruses and cancers is huge.
Peregrine’s a novel compound seems to work like this. Essentially, when
cells in our bodies get infected or altered by viruses and cancers, they
change in the following way. As cells get stressed by these ailments, they
get confused about some of their maintenance tasks. One result is that
phospholipids normally found on the inside of cell membranes wind up on the
outside.
This has two key implications. When viruses leave the cells they’ve
infected, bits of the membranes from those cells envelope those virus
particles. The exposed phospholipids on those membranes serve as targets for
Tarvacin, Peregrine’s lead compound.
It’s similar with cancers. Stressed by cancer, the cells in blood vessels
feeding cancer cells also get confused about their maintenance tasks. So the
internal phospholipids end up on the outside of the cells. Bingo, another
target for Tarvacin.
Tarvacin works essentially by attaching to problem cells and suppressing the
signals from them that throw off our immune system. This way, our immune
system can key in on the problem cells and destroy them. “Tarvacin
reprograms the body’s own natural defenses to recognize and fight disease,”
says Peregrine chief executive Steven King.
Tarvacin could work against a broad range of viruses, including the ones
that cause influenza and Hepatitis B and C, herpes, West Nile, Dengue, HIV,
SARS, avian flu and many of the potential bio-terror “hemorrhagic” viruses,
like Ebola. Early studies in animals also show that Tarvacin acts as a kind
of vaccine against further infections of the virus it was originally used to
treat.
Tarvacin may also work against several kinds of cancer, so the potential is
huge here, too. Blockbuster anti-cancer therapies like Avastin and Rituxan
from Genentech (DNA) produce billions of dollars a year in revenue, and
Tarvacin could be in this league.
Peregrine also has a compound it is testing for brain cancer, called Cotara.
It seems to work by gathering in dead cells inside tumors and serving as a
kind of magnet and anchor for radiation treatments that fix to the Cotara,
destroying tumors from the inside out.
Peregrine jumped to $1.50 per share from about 90 cents in early January,
apparently on news that:
- Tarvacin controlled the spread of pancreatic cancer in mice
- Peregrine enrolled patients months ahead of schedule in a study on
how Tarvacin works against Hepatitis C
- the Defense Department announced a grant to support research on how
well Tarvacin works against prostate cancer.
For the rest of the year, several clinical milestones may draw further
interest in this company. They include:
- advances in its study on how well Tarvacin works against Hepatitis C
- completion of enrollment in studies on how well Tarvacin and Cotara
work against cancer
- an expansion in the list of viruses that Tarvacin may work against
This is a long-term buy and hold that requires patience because all of these
therapies are still far from commercialization. But the potential is big, so
it makes sense to tuck away some of this stock in your portfolio.
Fossil
Teen retailer Fossil is still not doing press interviews, so it’s harder to
get a grip on out what might turn it around. Normally that kind of reticence
is a big red flag.
But the insider whose multi-million dollar purchases originally put us in
this stock (http://www.investorideas.com/insiderscorner/Articles/Insider_Signal.asp)
is buying huge amounts in the recent pull back. The buying is so big I’ll
reload this position, too, in a kind of blind faith that managers will get
this retailer back on track.
Why have this kind of blind faith in investing? Because typically,
management teams who once figured out how to design hot retail products for
teens can figure out how to do it again after a cold spell. Just look at the
ups and downs of retailers like Abercrombie & Fitch (ANF)
and American Eagle Outfitters (AEOS)
over the years.
The recent buying came when chief executive Kosta Kartsotis stepped up and
purchased $2.4 million worth of the stock in the $17.60 to $18.30 range
after the shares dropped about 25% following a February 2 earnings warning.
The bottom line: Biotech companies and teen retailers are notoriously
risky. Even when insiders buy huge amounts, it’s no guarantee the stocks
will go up. But Peregrine has products that may be in the same league as the
ones that rewarded Genentech shareholders nicely and the Fossil chief
executive is plowing so much money into his stock at these levels, both are
worth a shot as long-term plays.
Disclaimer
At the time of publication, Michael Brush owned shares of Peregrine
Pharmaceuticals. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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