MYGN- A Lesson in Managing Risk

“Good judgment comes from experience.  Experience comes from bad judgment.”

I don’t know the author of the above quote, but it’s one of my all-time favorites.  It would shock me to hear any long-term investor to challenge the notion that they learned more from their investment successes than from their investment losses.   Which brings me to MYGN…

Myriad Genetics is a Salt-Lake City based company that develops molecular and genetic diagnostic tests primarily for various forms of cancer (breast, ovarian, melanoma, etc.).  With over 20 years in existence, an established track record of profitability, seemingly strong positioning in a growth industry, and  a low market valuation (26% LTM ROE, 10 times trailing P/E), I decided to purchase this stock in late November 2013 at $28/ share.  It violated a key ATG principal of being a well-established stock I’d be willing to hold onto forever if need be,  but it filled a bucket in my healthcare allocation which has been difficult given the run-up in many healthcare related stocks over the past year.  On a side note, this stock also came up on a value-stock screener from magicformulainvesting.com, Joel Greenblatt’s free screener based primarily on ROE and ROC metrics.  (Remember what you can expect to get from free services… 😉

Today the stock closed at $20.79/ share which includes a 16% one-day decline due to news that the new healthcare laws are significantly reducing their reimbursement percentages for MYGN’s signature breast cancer diagnostic tests.  In addition to this bad news, they were served with patent infringement lawsuit notices from a competing firm two weeks ago.  From where I bought the stock just over a month ago, I’m staring at a  27% loss in only 30 days!!  I had read an article from management prior to buying the stock that they did not have material concerns about either issue (with no concrete evidence to support their optimism.).  Bad news bears.

The good news is that I will survive this grenade and it will have a limited effect on my overall portfolio.  Thankfully I only allocated about 3% of my portfolio to this purchase, mainly because its a relatively small company ($1.6B market cap) and because I spent minimal time fully vetting the company and their risks (which were easily accessible once I performed a “poste-mortem google”.).  I have yet to sell the stock, but I plan to do so soon unless I have a compelling reason (after fully researching them) that they can recover from the the patent challenges and reduced reimbursement amounts.

I want to leave you with a couple of very simple lessons from my experience on MYGN:

1.  Never make an investment bet (no matter how sure it seems, like the Broncos winning the Super Bowl this year) that you can’t survive if it turns against you.

2.  Diversifying is important, but be thoughtful and solicit feedback in selecting various securities (for diversification purposes) that you may not know a lot about.

3.  Falling in love with a story (like a profitable company that creates helpful genetic testing) is a great way to find investment opportunities, but the research CANNOT stop there.  Do your homework, stick to your knitting, and know what you don’t know before diving in!

I have a close friend friend from college who happens to cover healthcare technology stocks for a hedge fund.  Did I ask him for his advice and input before buying MYGN?  Of course not- that would have been too easy!!

In the pursuit of being right more times than wrong,

-Maverick

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One thought on “MYGN- A Lesson in Managing Risk

  1. MYGN is closing in on $40/ share as of 2/21/14, almost DOUBLING since the writing of this post! Often times its better to be lucky than good- I held on to the stock with major mixed emotions and fortunately a stinker turned into a good gainer. They announced a big merger and resolved their patent litigation, sparking the huge surge. I’m selling now before the tide turns again (and to offset some of my weight watchers blues 😉
    -Maverick

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