Plan B was put in place immediately. I would only spend time with those companies I planned to recommend with Buy ratings. Still, the effort consumed more time than I expected and my target launch date of January 1986 was pushed back. By year-end 1985 I had settled on what was going to be my first Buy recommendation.
The company was Integrated Genetics, which had its IPO in July 1983 at $13 per share. However, in the summer of 1985 it was trading in the $3-4 range without necessarily any great disappointments in the science or the business operations of the company. I had built a valuation model that clearly showed a target price of $16–17 against a 1985 year-end closing price of 5 ¼.
Integrated Genetics looked like a screaming Buy to me. All that was fine, except that my procrastination was accompanied by a steady rise in the stock. By mid-March 1986, as I was about to launch, the stock had reached about $10 a share. Unbeknownst to me the 1986 market window for biotech stocks was about to open.
I will never forget the conversation with my boss, Frank LeCates, head of equity research at DLJ, when I sat with the Investment Selection Committee to get clearance to proceed with the recommendation. He had read the draft of my report and before I began explaining my investment thesis, he asked me a simple question: “Are you sure you want to recommend a stock that has gone up 300% in six months?”
With the bravado that they told me I needed to survive on Wall Street, I looked him straight in the eye and said: “This stock has legs. My model says that the fair price is $16–17.” He paused and looked at me. In retrospect, I am sure he was trying to ascertain just how stupid I was and he was probably regretting that he ever hired me. As if in resignation, he took a puff on his cigar and said: “Fine. Go ahead with it.”
The meeting was over. I walked out of the room satisfied with myself, not realizing that I was being dropped into the ocean without knowing how to swim. My superiors hoped that the experience would teach me something valuable and make me a better analyst. Of course, they were absolutely sure the recommendation was not going to work.
But they were wrong. I launched coverage on March 21, 1986, with the stock at 10 3/8. For the next few weeks the stock did not even stop to take a breath and on April 17 it had gone above 17 intraday before closing at 16 3/8.
I changed my recommendation to Hold in the middle of the day on a price basis. It seemed so simple! Profits were to be taken from Integrated Genetics and plowed into the next idea—Amgen.
The company had its IPO in June 1983 at $18 a share (considering the 48:1 aggregate stock split that would be $.375 in today’s capitalization). After some difficult times in 1984–85 the stock was enjoying renewed interest from investors and was going up during early April. I was in a near panic as the stock reached almost 27 on April 16, fearing that all my work would have been for naught if I were not to recommend the stock.
But over the next few days, the stock took a quick slide and I came in on April 22 to recommend it at 22 3/8. The stock was choppy for a while and lost a dollar or two but by early May it was up to 27 and even higher by June. In the meantime, as if Integrated Genetics was conspiring to make me look smart, the stock started a downward slide the day after my change of recommendation and never recovered until it was acquired by Genzyme in August 1989.