My Stock Winners

It wouldn’t be a big surprise if a big name decides to get in bed with Inhibitex because it’s happened before. There are a number of patient groups, including approximately 300,000 end stage renal disease patients in the United States, geriatric patients receiving chronic long term care, and patients undergoing certain elective surgeries, who are at risk of acquiring a staphylococcal infection. For these high risk groups, an active vaccine may be a less costly and preferred mode of therapy. Inhibitex entered into a license and collaboration agreement with Wyeth (WYE) to develop vaccines against staphylococcal organisms. The timing of today’s edition is no coincidence because:

If Wyeth does not enter into Phase clinical trials for drug by July 31, 2007 they will have to start paying annual research fees of $1 million vs. $500k.
Considering that Wyeth has a market cap of $65 billion dollars we doubt anyone will lose sleep over half a million dollars. However, if a Phase I trial is initiated this should prove that the technology behind Inhibitex should be worth more than negative.

Amazon is a very good company no doubt, but a company who’s stock price has gotten way ahead of itself based on suspect numbers. Amazon surprised analysts with 1st quarter numbers released on 4-24-07. Dig deep into the Q1 numbers and you will find that the numbers are actually quite worse than they first appear. Most of the earnings surprise was due to lowered R & D expenses, favorable foreign currency gains of $84 million, and a favorable effective tax rate change to 23%, down from an effective tax rate of 47% in Q1 2006. If you took out the favorable tax rate and favorable foreign currency gains, the profits could easily be flat to lower. These are clearly not operational improvements that warrant such a large appreciation in share price. While the 23% effective tax rate will probably remain for the balance of 2007, there is no visibility in regards to Amazons 2008 effective tax rate. This rate is likely to be higher in 2008. Take out the favorable foreign currency gains and the numbers are materially different. Equally troubling is operating cash flow. For all practical purposes, flat year over year, even with improved top and bottom lines. Analysts are lowering guidance for the retail space, competitors are showing tough comps already, not a positive macro outlook in retail. Additionally, Amazon’s profit margins are extremely low and now it’s rumored that the years biggest blockbuster “Harry Potter” will be sold at cost. The biggest release of the year and Amazon apparently is using it as a lost leader! Given a PEG ratio of 3, a PE at 117X earnings, and the financial findings I’ve mentioned above, the risk of a severe multiple contraction is extremely probable.