Wall Street players set off for their August vacations on Friday, but not before breaking records that had lasted up to 21 years for returns in July. The Dow Jones index rose 8.4% last month, a rise the like of which has not been seen since 1989; the Nasdaq rose 7.8%, the largest July rise since 1997; and the S&P 500 broke a record for July set in 1988, by rising 7.4%. Of the 30 shares on the Dow Jones index, Caterpillar (CAT) was the best in July, with a rise of 35%, while McDonald’s (MCD) was the worst, with a fall of 4%. Perhaps this means that investors reckon that the recession is over, and that the earth movers will be moving again while fewer people will visit cheap food chains.
Among the Israeli stocks I hold in my portfolio, Elron (ELRN) stood out last week. It rose 60% over the week, and has risen 300% this year to date. The rise is entirely attributable to US Food and Drugs Administration (FDA) approval for subsidiary Medingo to sell in the US a patch that is a unique insulin pump. I added Elron to my portfolio exactly two years ago following a meeting with then CEO Doron Birger. I formed the impression then that the company had a very handy portfolio of private companies, mainly in healthcare and cleantech.
I estimated that one or more of Elron’s holdings was likely to grow over the years, and be the next Given Imaging (GIVN), a company that, at its peak, had a market cap of over $1 billion. Elron owns a quarter of it. Elron believes that, just as Given Imaging’s capsule is really a broad platform that in the distant future will be used not just for imaging but also for delivering various drugs in the body, so too Medingo’s technology is likely in the future to become a broad platform for assisting diabetes sufferers, and will not just be used for absorbing insulin.
Elron has two large public holdings: Given Imaging, and Netvision, which is traded on the Tel Aviv Stock Exchange. The holding in Given Imaging accounts for about half of Elron’s market cap, which is currently $160 million. The company is in negotiations to sell its stake in Netvision (15%) to its parent company, and at the current market price it should receive around $50 million for it. On the other hand, at the end of the first quarter, Elron had long term liabilities of $40 million.
When I bought the share two years ago at $12.50, I didn’t imagine I would see the low of almost $1 at the height of the crisis in November 2008. Today, after it has recovered to $5.5, it is clear to me that it requires a great deal of patience to see a profit on the investment in it. Selling the Netvision stake will sort out Elron’s balance sheet, but the locomotive is still Given Imaging, and the hope is in the railcars behind it, in the private holdings like Medingo, which is due to announce its marketing strategy in the US in the next few months.
Given Imaging, which will release its second quarter financials on Wednesday after the market closes, is going in the right direction, in my view. Despite the crisis, it should report year-on-year growth and an improved profit, just as it did for the first quarter. I believe the company’s next dream is the forthcoming launch of a second generation imaging capsule for the large bowel with substantially improved diagnostic capability. If that happens, it will gain FDA approval for selling in the US, which was denied the first generation capsule, which was not effective enough. The large bowel capsule will never replace unpleasant colonoscopies, which enable the surgeon to take biopsies for laboratory testing, but it should be an easy and fairly cheap intermediate solution for the many people who would rather avoid the harder procedure.
Published by Globes [online], Israel business news - www.globes.co.il - on August 4, 2009
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