Submitted by Mike Anthony as part of our
in this weekend's
magazine regarding Opko Health (
) is superficial and parrots an elementary argument that has been
unpersuasive for years. I will justify my argument in the article
that follows, explaining to readers why shorts will likely get
squeezed in Opko Health, just as they have been squeezed in every
major company led by its CEO, Dr. Phillip Frost.
Arguments coming from
automatically receive the benefit of massive distribution, an
affluent readership, and the "steamroller effect" of Wall Street's
most powerful weekend publication.
circulates to over 300,000 households holding an average net worth
$3 million each
. According to a 2010 survey, 96% of readers take action after
(many by buying or selling securities featured in the
As we all know, however, might does not make right. To the
Sweating Out the Results of a Blood Test,
author Bill Alpert abuses the marketing influence of
while failing to justify his conclusion. Below, I explain that his
article makes an intellectually disappointing argument that has
been parroted for many years.
Alpert's Article Is Superficial
The depth of Alpert's analysis reflects the self-evidently brief
amount of time he spent reflecting on Opko Health. This is not a
personal attack- to see the shallowness for yourself, search online
for "short Opko." You will effortlessly retrieve thousands of
essentially identical analyses. Search and see for yourself. What
is the most publicized argument for shorting Opko Health? I have
heard it repeated so often that I could recite it backwards: Opko
Health has a high price-to-sales ratio. In other words, if you
evaluate Opko Health shares as you would for a typical business,
basic analysis will show that it is overvalued in proportion to
Of course, this makes me want to slam my face into my palm.
This mantric conclusion inexplicably causes no less glee for
shorts even upon its thousandth repetition. Honestly, I almost do
not care to correct them anymore. Facepalms are easier. Here is
Why Skimming the Surface Is So Alluring
In his analysis, Alpert provides a glib overview of Opko Health
and its CEO, Dr. Phillip Frost. Quickly glossing over the largest
systematic insider buy program in stock market history and the
68-fold rally in Dr. Frost's prior company (among other trivial
factoids), Alpert then presents the meat of his article by
evaluating technical problems within a couple of Opko Health's
I will spare you the paragraphs of analysis and jump to the
conclusion (spoiler alert!): some Opko Health products have been
discontinued and others might have marginally lower sales than had
been originally forecasted. Alpert concludes by insinuating that
investors should pass on Opko Health until revenues increase:
"prospective investors might want to wait for the validation that
comes with real fundamentals."
So, why is my face in my palm?
Simple. Any college freshman can look at an income statement and
note that $40 million in annual revenues with a $1.25 billion
market capitalization equates to an overvalued share price by
conventional metrics. This calculation requires no more than 30
seconds of thought.
If the college student were to reflect for a while, however, he
or she might realize that Opko Health cannot be appropriately
analyzed using a price-to-sales ratio.
Indeed, the vast majority of Opko Health operations are in
research and development. Why should an analyst therefore rely on
current or near-term revenues when calculating fair value? No
competent analysts are forecasting revenue numbers for 2013 or 2014
that would satisfy a conventional price-to-sales ratio for Opko
Health. Perhaps, then, the student might look ahead in the textbook
to more advanced valuation methods?
Opko Health is a multinational conglomerate with over 220
employees. It generates about $40 million in annual revenues
despite the vast majority of its operations focusing on research
and development. Cash flow is healthy, burn rate is minimal, debt
levels are nominal, and insider buying consistently tops the
charts. So although the share price seems high based on a
traditional analysis, the company does not have any threats from
Moreover, the company's structure is not hierarchical and does
not align with typical operating structures. Instead, it functions
more as a bank of businesses- a holding company.
Aha. Opko Health Is a Holding Company. There It
Alpert's article in
began and ended with the same, superficial perspective: If Opko
Health's shares traded like a traditional company, they would trade
at a lower price per share. Thank you, Alpert. Thank you for
telling us, again, that Opko Health shares have a high
price-to-sales ratio. If it were not for your article, we would
only have had a thousand other articles with the exact same
Alpert failed to analyze Opko Health as a holding company. This
would have required a complete rewrite of the article. A holding
company cannot be analyzed like an operating business, just as a
bank cannot be analyzed like a mining company.
* Alpert failed to reflect on the implications of Opko Health's
corporate structure as a holding company, which would have
fundamentally altered his entire perspective on the valuation of
long-term opportunities to serve human health
near-term revenue estimates.
* Alpert inappropriately chose sensational valuation metrics for
persuasive effect rather than useful analysis.
* Alpert failed to address the years of real market prices that
have disproved his theory of "it's not possible through fundamental
research to say that Opko Health is worth more than a billion
* Alpert failed to look beyond superficial financial statements and
* Alpert focused on marginal revenue reductions for a few of Opko
Heath's products while neglecting dozens of other multi-million
dollar opportunities (and some billion dollar opportunities)
incubating at Opko Health.
Ultimately, Alpert did little more than parrot an elementary
argument that has been unpersuasive to the market for years. Opko
Health is a health sector holding company that is currently trading
at $1.25 billion. It is not trading at that valuation because of
current or near-term revenue. It is trading at that level because
investors vote with real money (not commentary) that Opko Health
owns and is building long-term value.
Opko Health is the final life work (and likely gift to the
world) of one of the
world's most successful pharmaceutical
who is quite pleased with prevailing market prices, happily buying
tens of thousands of shares every day and shrinking the supply for
shorts. As he approaches retirement, perhaps Alpert should recall
those trivial factoids about Dr. Frost's long-term executive
performance. What if Dr. Frost decided to buy all the shares he was
planning to buy over the remainder of his lifetime in the course of
a few weeks?