The Spell is Broken for Veeco Instruments

Veeco Instruments (VECO) has been through a lot of wars and has logged the hard miles since its founding in 1945. You don't stick around that long in the technology industry unless you can adapt to new innovations and paradigm shifts. Currently, they are locked in combat on many fronts: the cyclical nature of the semiconductor sector, investor psychology, and, the growing global sovereign debt crisis. Somebody threw a wrench in the works, and Veeco's shares dropped from $57 on May 31st, to its current price of $28. That's a 50% decline in only four months. Traders took the hide out of it.

This is a follow-up to my initial February 24th, 2011, article: Veeco Instruments' Upside? Depends What Uncle Sam Does. At that time, the equity had just about reached a boiling point, but this is in hindsight. Very few predicted that the stock would take a nosedive because green technology securities were in vogue, and it looked like Veeco would continue its ascent. The manufacturer of LED and Solar Process Equipment had a terrific two year run beginning at $3/share in 2009. It really amped up earnings before it hit the skids. A twenty bagger if you'd bought at the bottom.

There are many benefits to alternative energy sources, but they aren't cost-efficient unless backed by government subsidies. Even in his January State of the Union Address to Congress, President Obama referred to his push into renewable energy as 'our Sputnik moment'. You can make the argument that both the Soviet Union's and the United States' space programs were great for national unity on both sides of The Cold War, but they also cost a lot of money.

As much as I believe in green technology, there are other issues which have taken center stage both here and abroad to siphon off taxpayers' dollars. Renewable energy got caught in the cross-fire, and, as much as Wall Street likes growth, I believe this security has more room to go on the downside because earnings and margins are contracting.

On the margin front, CEO John Peeler states in the July 28th, Q2 Conference Call: "...we expect Q3 margins to temporarily to dip down to 47% or 48%...This will likely be a one or two quarter situation and Veeco's overall gross margins should tick back up to the 50% level.". Or will they? Earlier in the conference call he explains: "In the short-term we think that MOCVD (metal organic chemical vapor deposition) orders will likely be impacted by near-term LED backlighting demand and global macroeconomic concerns.". I'm from the school that these global macroeconomic concerns may be looming larger than what most CEOs are saying in their conference calls.

Belt-tightening is not only happening in Europe and the United States, but in the Asian countries too. The majority of Veeco's customers reside in China, Taiwan, South Korea and Japan, and, all of these counties have ambitious LED adoption policies. For example, China's goal for LEDs is to be 30% of general lighting by 2015. However, this could very well change with a world-wide recession or depression. The next few quarters may really rattle investors along with government policies. The globe has not decoupled, at least in my book.

On the earnings side, analysts do not believe that Veeco can maintain it's record shattering growth next year. Consensus earnings estimates on Yahoo Finance are $5/share for 2011, and, only $3.43 for 2012. The lowest estimate for next year is for $1.80/share. If those anemic valuations are obtained, then the stock would go down in flames one more time. The optimistic valuation for 2012 is $6.35/share, but I just don't see that. At least from reading the last two earnings call transcripts.

As a long-term play, this is a solid organization, and, is taking market share from its rival Germany's Aixtron. It's also in the forward looking industry of renewable energy. We are not in the rotary phone era; we're in the smartphone era, and Veeco Instruments should be commended on the steps they've taken to be one of the leading companies in the alternative energy space. That said, investors now only hold stocks for a matter of months, as opposed to a matter of years the way they did it 40 years ago. It's a traders market now and I believe there is more downside to go on this security as investors continue to bail on the market.

Celgene Expands Into Solid Tumor Oncology

For those in the medical profession, or, in the investing cosmos, Celgene (CELG) needs little introduction. From the vantage point of investors, Celgene is a kingpin in the biotech sector, and, although it has hovered in a trading pattern for the past five years, it is starting to rise again. Through the lens of the medical community, Celgene's flagship pharmaceutical Revlimid is primarily used for blood-borne (hematological) cancers. Its main usage is for treating multiple myeloma, and, commands a large market share, a market share that has been steadily growing.

As CEO Robert Hugin explains in the July 28th, 2011, Q2 conference call: "Revlimid sales continue to be strong with 35% year-over-year growth. In the United States, Revlimid has approximately 50% of the overall myeloma market, up 2 points versus last quarter and 52% share in second line also up 2 points versus the first quarter of the year. Increasing duration of treatment is a continuing indicator of effective chronic disease control and a valuable growth driver. International sales grew 43% year-over-year.".

Although Celgene is pigeonholed as first and foremost an organization that battles hematological disorders, this is about to change. In 2010, the company acquired Abraxis Biosciences with their drug Abraxane. Abraxane is approved for metastatic breast cancer, and, Celgene is slowly introducing the product on a worldwide basis with their globally positioned sales staff. Abraxane is also in Phase III trials for non-small cell lung cancer, pancreatic cancer and melanoma.

"Expanding our oncology franchise is an important objective.", says CEO Hugin in the Q2 conference call, "Abraxane sales grew by 28% quarter-over-quarter to $95 million. Following the completion of the commercial team integration and the repositioning of Abraxane, sales in the United States grew 15%. In Europe, Abraxane is being launched in the 4 major markets and will continue to launch on a country-by-country basis in the second half of 2011 and 2012.".

In total, Celgene has an eye-opening 25 drugs in Phase III trials. These are not all different medications, but different uses for some of the products they already have on the market. For instance, Revlimid is currently being examined for a multitude of remedies that include blood-borne cancers and also solid tumors. Non-Hodgkin's lymphoma is one of the hematological battle grounds Revlimid is being studied for. In addition, it is being tested for tumors in areas like prostate, pancreatic and colorectal cancers. It's a hotbed of activity.

The 2010 sales breakdown for Celgene's pharmaceuticals are as follows: Revlimid 68%, Vidaza 15%, Thalomid 11%, Abraxane 2%, and, the remaining 4% from royalties. Vidaza is the global market leader for patients with high-risk MDS (meyelodysplastic syndromes), and, Thalomid is used to combat multiple myeloma and leprosy. You may have noticed that both Revlimid and Thalomid are both prescribed to treat multiple myeloma. Thalomid was Celgene's first drug on the market to address the malady, and, Revlimid is its successor.

What stands out to me about the product mix is that 94% of the company's revenues are derived from the hematology market. Although it's a lucrative sector, and, Celgene's estimated sales for 2011 is 4.5 billion dollars, it's the solid tumor area where they stand to really profit. As the CEO stated in the 2010 annual report: "The global oncology market is five times the size of the hematology market.". With Abraxane constituting only 2% of sales, and, Revlimid just getting started in this new arena, Celegene could be writing a blueprint in how to make money, for both the company and for investors.

The world has taken a few spins since I originally covered the company on February 21st, 2011, in a posting Celgene: Biotech Baron or Barren Biotech. In the article I stated that I believed the stock was undervalued, and, that investors would make money in it if they had two year horizon. I also said that I would not be buying the security at that time because I thought the market was going to correct. Well, the S&P 500 went from 1315 to 1138 since that time, down almost 200 points. However, Celgene bucked the market trend, and, went from $53 to its current price of $62, a gain of 17%.

I am not sure what the catalyst was for the price appreciation, but you would've made a chunk of change if you bought Celgene in late February. It paid off pronto. Although the first Phase III trials will not have their results in until early 2012, there is a lot to like about this top-notch security. As is, not only the company, but Wall Street seems to believe in its future. It's got a short float of only 1.8%, and, 89% of its outstanding shares are owned by institutional investors. On the company side, as of June 30th, Celgene had $2.8 billion in cash on the books, and, in August, the board of directors authorized a $2 billion buyback of shares. Insiders seem to like it, too.

Let's check out the stat sheet to see where analyst estimates are. According to Yahoo Finance, Celgene's average earnings estimates for 2011 and 2012 are $3.60/share, and, $4.23 respectively. At $62/share, that gives us P/E Ratios of 17.2 for the current year, and, 14.7 going forward. Very reasonable for a growth stock. However, when you consider the five year CAGR (compound annual growth rate) is a whopping 24%, you get bargain basement PEG Ratios of 0.7 for 2011 and 0.6 for 2012. The equity is still undervalued even after a 17% run.

Celgene has a lot of cachet, and, I would buy it in a heartbeat, but am currently out of the market. In fact, I have short positions in some of the major indexes like the S&P 500, and, will remain there until I believe the debt crisis has been resolved. The company should be given the priority treatment in regards to its share price, but still seems to be going through the motions on a five year timeline, trading between $45-$60. Although it has recently crested the $60 milestone, I will wait until the global debt crisis has come to culmination before I invest in this quality equity.

Debt, Deficits, and the Demise of the American Economy

In early May, John Wiley & Sons released Debt, Deficits, and the Demise of the American Economy by Peter Tanous and Jeff Cox. I looked forward to reading this book because Jeff Cox is one of my favorite financial writers, not only at his post at CNBC.com, but on the entire World Wide Web. Unfortunately, I came away from the publication dissatisfied with the contents. Not the writing, which I expected to be solid, and, not the subject matter, but that it doesn't distinguish itself from the pack of books that are already out there.

I don't mean to violate the company handbook by not endorsing it, and, I am not going to give it a tongue-lashing because it does have merit. However, there are other books on the shelves on the same subject (and yes, many of them are from the same publisher), that better command your attention and disposable income. These other books I'm referring to by Wiley are The Age of Deleveraging by Gary Shilling, Endgame by John Mauldin and Jonathan Tepper, and, Aftershock by David Wiedemer, Robert Wiedemer and Cindy Spitzer.

All of the above publications, including Debt, Deficits, and the Demise of the American Economy, discuss the global sovereign debt crisis, how the handwriting is already on the wall, and, that we are at the point of no return. It's like our fate is sealed and you can see your life flashing before your eyes. These are all distinguished authors. They don't live on their own planets in an alternative universe. They tell it like it is. You may not agree with what they are saying, but they back up their arguments with facts, and lots of them. They see financial thermonuclear disruption. It's too late to talk it off the ledge.

That's not saying that all this is going to come to pass. It's just their theories, theories that I've subscribed to for a few years. None of the authors give a timetable when all of this will happen, but they believe it will be soon. I don't intend to shortchange Debt, Deficits, and the Demise of the American Economy, it's just that out of the four books I've mentioned in this review, it's last on the reading list. In addition, it doesn't give you enough information on where to park your assets other than to invest in oil and gold. Although I did learn a few things from the book, I wanted more. Maybe I just expected too much.

That said, even though I did not glean that much new information from Debt, Deficits, and the Demise of the American Economy, it may be a good starting point for those of you who haven't read the other three books I have mentioned. The Tanous and Cox publication is a more breezy read as opposed to the other ones. In addition, there is an immediacy to the book in that it discusses the unraveling of the European Union and how that will be the trip hammer for a global meltdown. Not to give too much away, but after Europe implodes, the United States is next, at least according to the book. End of story.