It's every investor's dream. And this one came true...
For lucky shareholders in this formerly tiny maker of automated medicine dispenser machines, last November's election changed everything.
No, not that election. And, no, not just any medicine.
I'm referring to the state ballot in Massachusetts... along with a medical treatment that's still illegal in most parts of the United States.
You see, the "medicine" that's distributed from this company's dispensers is marijuana. And after the Bay State's citizens voted to make Massachusetts the 19th U.S. state to allow the use of cannabis for medicinal purposes, the mainstream media took note. (Adding to the storyline was the fact residents of Washington and Colorado on the same day voted to make recreational use of marijuana legal.)
Topping Marketwatch's short list of stocks "for regular investors looking to get in on the action... without having to actually grow or sell drugs" was Hollywood, Calif.-based Medbox Inc. (OTC: MDBX), whose patented machines use biometrics to verify patients and doses. Also, as the company's founder told Marketwatch, the machines could potentially be used in ordinary drugstores too.
Two days later, the $4 stock was trading at $200 a share, and the $45 million company was worth billions. Now that's a Hollywood feel-good story if there ever was one.
Welcome to the world of game-changing stocks.
In the case of Medbox, share prices quickly fell just as fast, but not as far. On Friday, Dec. 28, MDBX closed at $63, down from the high, but still up a whopping 2,400% from the company's debut on the over-the-counter (OTC) market.
In his most recent issue, Andy pointed out that the Medbox example is extreme but hardly isolated. Every year -- regardless of the market environment -- companies emerge seemingly out of nowhere to deliver eye-popping returns to early shareholders.
Andy admitted he didn't see this one coming (for more on Andy's Medbox "confession," see the interview below).
But the fact that the sudden burst in Medbox was triggered by a news article suggests that neither did anyone else.
With or without Medbox, however, there was money to be made in the game-changing universe in 2012.
Last February, for instance, Andy recommended Human Genome Sciences (Nasdaq: HGSI), which had developed the first new drug in 50 years to treat Lupus, a chronic inflammatory disease that can affect various systems of the body, especially the skin, joints, blood and kidneys. At the time, HGS was trading at $9.16 a share; less than five months later, British pharmaceutical giant GlaxoSmithKline (NYSE: GSK) bought the company for $14.25 a share -- a 55.6% gain.
In July 2011 Andy named Celsion (Nasdaq: CLSN) his top cancer-treatment pick on the strength of a promising liver drug. At the time, the oncology drug developer was a $50 million company trading at $3.13 a share. Earlier this month, the $272 million company posted a 52-week high of $8.86 a share. That's a gain of $183% against a meager 6.8% increase in the S&P 500 during the same period.
This past summer, Andy published a special issue on business development companies (BDCs), which are a form of publicly traded private equity that invest in promising businesses. His top pick on June 20 from 27 such stock: Main Street Capital (Nasdaq: MAIN), which has since appreciated 26.5%.
For more on Andy's quest for game changers, read on...
Bob: What's your analysis of Medbox? At what price would you be a buyer?
Andy: Medbox is an important story for investors to be aware of. I hope that the huge returns catch people's attention. But let me be clear: I would not be a buyer of Medbox at anything near its current valuation. The stock flew too high, too fast. It is unlikely to be able to produce results that will justify its current prices.
First, a confession. I didn't conceive of the marijuana initiatives as an investment opportunity. So that has to be the first lesson: Never let a failure of imagination limit your investment choices. Do not confine your cerebral activity to the interior of an enclosed rectangular space. Or, to put it another way, "Think outside the box." I didn't on this one. I wish I had.
But having said that, let's look at Medbox. It's not actually in the marijuana business. It doesn't even make money from the sale of medicine. It simply provides machines that verify documentation and identity and then dispense. Now, as I mentioned in the newsletter, there's a lot of detail work in that -- tons of red tape to wade through. Medbox came up with a nifty tool to do just that. But CareFusion -- a stock I have recommended in the past -- has the same sort of dispensary, and with a much stronger brand and vastly superior market position. The Medbox technology is good, but it's not the only competitor in its field, nor is it the best. That's lesson two, then: Always invest in stocks with the best technology coupled with the best industry position.
Finally, and maybe more importantly, heed the words of country music legend Kenny Rogers, who tells us to "know when to walk away, and know when to run." Investors have to be clear-eyed as to whether a trend has played out. This one has. It played out on Election Day. MedBox was long on ink and light on squid. There is perspective to be gained, but that's the extent to which I would seek to profit from these shares at this point.
Bob: Some of the stocks I mentioned above, including Medbox, achieved game-changing status relatively quickly. But that's not always the case, is it?
Andy: Let me bring your attention to Obermueller's rule number two when it comes to investing in potential game changers: The aggressive growth investor must be patient. Or, to put it another way, "A nut has to stand his ground for a long time to become an oak."
If you look at companies that built and kept strong businesses, the stock chart is revealing. Typically, not all the years were good ones, and most success stories took years to make the journey from nano cap to mega cap.
In the most recent issue of Game-Changing Stocks, I cite the example of Apple (Nasdaq: AAPL). The iPod, the device that began Apple's transformative march, was released in November 2001. The share price was around twenty bucks at that time, and the stock was functionally dead money for two years. Thereafter, the shares rallied, though the company also saw periods where the stock turned negative.
That's why I frame my advice about patience in terms of its cousin, confidence. When you really understand why a stock is a real game changer, then you have confidence. Confidence must be present for patience to triumph.
Bob: What are some of your other rules for investing in game-changers?
Andy: The first rule is: Be realistic to the point of hyper rationality. There's a lot to know before investing, and that reality -- those realties -- have to be acknowledged and accepted for what they are. Being realistic means collecting and assimilating a lot of information. I know that might sound obvious, even silly, but I see people skip this every day. I get 100 emails a month from otherwise intelligent people who fail to heed the most basic information about their investments.
My third rule is a portfolio manager's most important job: allocation, allocation, allocation. Investors have to find a mix of securities that meets their needs and fits their risk profile. Aggressive growth should never make up more than 20% of a portfolio, and that might be high for some investors.
Bob: What are you looking at these days?
Andy: Health care, energy and some pure science - the next "big thing" stuff. I'm also interested in taking a global view of growth this year and investigating where the next boom will hit (my initial guess is Mongolia, though two other countries also intrigue me) I also see a whole lot of tech companies with a whole lot of cash on hand, and I'm interested to see what the early acquisitions in 2013 will foretell. So I'm all over the map. Basically, I hit the reset button every year and begin a new search. It might sound a bit chaotic, but I see a lot of areas to be really hopeful and excited about. I looked at the performance of the first year of second terms, and the average market gain since 1965 (Nixon 1973, Reagan 1985, Clinton 1997 and Bush 2005) was 13.8%, versus a historical average total S&P return of 10.9%. What's more, in two of those four years, the total return exceeded 30%. Given the relatively low earnings multiple of the market, 2013 might well be another breakout year.
[Note: As Andy is fond of saying, "all it takes is one solid game changer to move the needle on an entire portfolio." And Andy's had a number of them recently, including a pharmaceutical company that surged 55% in the five months following his recommendation... a biotech stock that is already up 183%... and a business development company that has gained 27% since he brought it to his subscribers' attention a few months ago.
To get Andy's latest pick, or to learn more about Game-Changing Stocks, you can follow this link here.]