While fear of uncertainty is the greatest fear of all, uncertainty is not the biggest impediment investors face. No, the biggest tripwire investors face is being certain of something, yet still being wrong - and not knowing they're wrong. For example, there are common errant assumptions about what a certain company's business is or even outright stereotyping of a company because of its stated industry. Some of the misconceptions are so, well, misconceived, that it makes you wonder if some really great stocks are being avoided just because investors don't understand the company's business model.
So, here are three clarifications that may put some names in a much more bullish light.
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Barely a Biotech, More Like a Landlord
PDL BioPharma Inc. (Nasdaq:PDLI) is classified as a biotech stock, but that's largely because there is no category for "royalty-generating organization." That's the core of what PDL does now though. The bulk of the R&D work has been done, resulting in the humanized monoclonal antibodies that are now used by other biotech firms as a biological foundation for everything from asthma to MS.
Of course, the use of PDL's antibody technology results in royalty payments. These payments accounted for 100% of the company's revenue last quarter, as usual. Genentech Inc - now part of the Roche Group - and Biogen Idec Inc., (Nasdaq:BIIB) are a couple of biotechs paying those royalties.
That's not to say PDL BioPharma isn't still working on new uses for its monoclonal antibodies. The complex work behind the underlying technology for all those potential new drugs, however, is the same one the company's been licensing for a while now. As such, R&D costs and risks are minimal.
What's great about it? Don't think for a minute that the business model means consistent income is guaranteed; last quarter's 31% dip in earnings is proof that PDL BioPharma isn't bulletproof. Still, the company could halt its current R&D work right now, cut expenses to the bone and still collect some good money off the backs of others. That's low-risk.
Hardly a Garden Variety REIT
When the company's description of itself includes REIT, residential mortgage, leverage or re-underwrite, that alone is enough to send most investors in the other direction. Chimera Investment Corporation (NYSE:CIM) uses all four terms in its description. Yet, it works for this REIT. Chimera has paid good dividends every quarter since its inception in late 2007, currently yielding 16.71%, and the trust began seeing full-year positive net income in 2009.
What makes Chimera different? At first glance, Chimera looks like just another REIT, and therefore faces the same mortgage-based risks any other REIT faces. When you dig deeper though, you'll find Chimera is actually managed by Annaly Capital Management, and that the trust specifically balances interest rate risk and credit risk - something most other REITs take more of an either/or strategy with.
Also - and this is really deep between the lines - you can tell that Chimera isn't buying off-the-shelf RMBS. They're custom-building their own RMBS deals with banks and lenders. That's a big deal.
Lumped Into Bad Company
Just so there's no confusion, MBIA Inc. (NYSE:MBI) essentially does the same thing that AIG Inc. (NYSE:AIG) did that put the insurer in hot water a couple of years ago. MBIA also does the same thing that Ambac Financial (NYSE:ABK) does, and Ambac is largely expected to become insolvent and/or declare bankruptcy in the foreseeable future.
Knowing that, why would anyone want to invest in MBIA? Aside from the plausible forward-looking price-to-earnings ratio of 7.37, there are two reasons MBIA is attractive right now.
First, it's not like the bond insurance or CDO insurance business is going away. In fact, with Ambac on shaky ground, and AIG still feeling the blow to its reputation, MBIA may actually enjoy a little less competition.
Second, though MBIA slipped into the red in 2007 and 2008 like most other bond insurers did, the company has seen a couple of operating profits as well as GAAP profits over the last four quarters. MBIA has slipped again in the most recent time periods. Semi-related, MBIA's ability to make really bad decisions and take on ridiculous risks never even came close to rivaling AIG's. So, give management a little credit.
There's always more to the story. And, sometimes the story you're sure is right turns out to be completely different. (Knowing what the market is thinking is the best way to determine what it will do next. For more information, see Gauging Major Turns With Psychology.)
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