tonights thoughts

Friday recap -- yep, TSRA had a great day as expected thanks to the ITC overturning its stay. I don't know when the actual trial will get started but I suspect it will take a month or so to get on the judge's calendar. That puts the AMKR arbitration up first -- although the big question will be when will we know something because that hearing is not open to the public. Will AMKR settle during the next week? its quite possible. I would expect the stock to rocket into the 30's if AMKR settles. I doubled down at 13.50 and I haven't sold any shares yet (if for no other reason than to avoid a wash sale since my 30 days post purchase aren't up until Friday the 4th of April).

By Friday's close I had made back about 400bps of performance vs. the S&P 500 in the last couple of weeks. TSRA certainly helped. I was as much as -650bps if not even more behind but as of Friday, I am only -250bps vs. the S&P 500. Not bad after such a strong year last year but I wouldn't mind beating the market each year.

Concentration vs. diversification -- wholeheartedly agree with Dr John that concentration is best and from what I can gather he seems to concentrate by industry -- picking promising industries and buying a collection of stocks when their prices are attractive. A very sound strategy although obviously I have simplified it -- see the comments to prior notes from Dr John for a fuller explanation.

Mine is a little more eclectic than that but somewhat similar. I have picked out secular themes that I see driving industry growth and then picking the companies that I think will benefit the most -- based on their competitive position and business models. I'm looking for the best business with the best growth drivers to my theme.

DNA related stuff is one of my secular themes -- the falling cost of genetic analysis and the immense discovery of new information is driving lots of growth opportunities throughout health care. Here are my plays:

LH -- growth in testing especially using DNA based tests which can be used to drive better diagnosis and treatment decisions

ILMN -- leader in genetic analysis tools -- driving the costs of sequencing down

TECH -- consumables used in protein and antibody research. these guys are a shareholders best friend -- they manage a tight ship, focused on future growth opportunities and they care most about driving high returns on capital.

GNVC -- development stage biotech drug company that uses adenovector virus' to deliver a gene that causes the tumor to produce a potent anti-tumor protein called tumor necrosis factor.

BLUD -- not my original reason for buying but they are going to be developing an automated DNA based blood typing instrument and consumables. What worries me about BLUD is that there isn't any true growth in blood type testing -- its all just price increases and automation improvements but no unit growth. maybe some unit growth overseas but competition is more serious too.

In the last week or so I have read about SIAL, IVGN, GHDX, SGEN, GPRO etc. I think too much of the good news is already in SIAL's stock -- TECH's PE is just 2-3 points higher than SIAL yet their organic revenue growth is at least as fast and their profitability is much higher. I could see SIAL being a better stock than TECH based on margin expansion. SIAL sells some proprietary stuff but a lot of commodity stuff too. don't know how far they are going to push that mix. haven't done enough reading yet. IVGN -- just don't trust that management team although they appear to have learned their lessons after some horrible deals.

SGEN -- will wait to hear from GNVC later this year -- if they have a successful PIII trial then the stock will pop and I will have the money to invest in other biotechs -- potentially this one.

GHDX -- still trying to figure out exactly what their tests are about. a biased short seller on seekingalpha.com has described their tests as essentially statistical coincidence or not necessarily cause and effect but mere correlation. He argues that their tests have no barriers to entry and that others will and have come out with competing tests. don't know.

I'm a financial guy -- no background in health care but only what I have read. So I don't necessarily have an insiders knowledge of health care or any sector other than financials but I still invest this way based on the confidence I have in what I have learned from my reading and basically pattern recognition. While I may not have that insiders edge, I hope that many of those that I read do or that together they do. Is my health care an exhaustive list? nope -- lots of names out there.

Why did I say I didn't want to be too exposed to health care? Because I am always cognizant of the fact that the demographics theme is crap -- you cannot pay for health care with demographics. Health care providers only take cash (in all its forms). Even though most of my holdings are in life sciences related they are still impacted by the total health care market -- R&D spend by drug and biotech companies is impacted by their revenues or potential revenues. Our 3rd party pays set up in this country is a crazy way to pay for health care -- very inefficient with the incentives lining up wrong. but some form of universal care would be even worse -- the health care industry would paradoxically shrink or at least be smaller than you would expect even with the addition of 40 mill new insureds.

I see certain areas being able to overcome this drag on health care spending growth -- life science areas, new life saving drugs and equipment, therapies that can be shown to save money over existing therapies.

Dr John is absolutely right that an information edge is essential to outperformance and those info edges don't come along too often so concentration is key.

I have several other themes that I am playing:

1. energy -- this cycle is going to last a long time because most oil is controlled by socialist nations that are not investing enough to grow supply to keep up with demand. CLB, MCF, ERF, EPD, MMP, VGENX are my plays

2. Asia -- lots of people, lots of productivity potential, where the greatest amount of wealth creation is likely to occur. mostly Matthews Asian Funds but also Wintergreen fund has a large asian exposure.

3. Internet -- Google -- advertising is a big market globally. Google's use of automation is amazing.

4. technology's ability to lower costs and open up markets: FLIR, UEPS, TSRA, etc. (CREE? NTAP?)

5. growth in assets under management, growth in derivatives, growth in credit etc. AB, DFR, CME, MCO. This one is in need of rethinking -- I have been saying to avoid financials and here I am with several of them. What I meant was financials that were lenders or brokers. Yet I am coming to the realization slowly that much of finance could see a big slowdown or lower margins based on the need for cost cutting and less volume as the sector digests about 2-3 decades of faster than GDP growth and rising margins. I still think MCO is a great business but I can also see them having $2.50 in earnings in 2011 -- or no growth from 2007-2011. so if they are selling for 15x 2011 EPS are they still cheap? probably not. need to be selling calls on this one in the meantime trying to make as much as possible while I know the stock is unlikely to go up.

Growth in money management also drives growth in FDS -- a great company built on great execution. But FDS needs growth in employment for the most part -- its true that they can grow by adding new applications so that fees per user go up but there are limits to that kind of growth. easiest growth is to add more users. perhaps this consolidation in finance will also impact money managers? its possible.

I am constantly searching for new themes or trying to think about whether other names would be better -- this is especially true as I watch my financial related names fall down the tubes. in that case more health care might be just what's necessary to outperform.