pSivida Corp. (Nasdaq: PSDV, ASX: PVA) $3.72 has run hard since I went long back in March. Or I should say has continued to run hard, as it’s share price almost doubled in early 2013 prior to my purchase.

Now PSDV has trebled this year, and if the good news continues it could double from here. But it could also halve in price.

That’s a return to risk of 2:1, so if you like those odds read on. If you want better odds, then also keep reading to discover how you may get them.

What sort of name is pSivida?

pSivida develops tiny, sustained-release drug delivery products designed to deliver drugs at a controlled and steady rate for months or years. It has developed 3 of the 4 U.S. and E.U. products approved for sustained release delivery of drug to treat chronic back-of-the-eye diseases utilizing multiple generations of its Durasert technology system.

pSivida’s lead product, ILUVIEN for the treatment of diabetic macular edema (DME) is licensed to Alimera Sciences, Inc. (Nasdaq: ALIM) and utilizes the third generation of the Durasert technology. Sales have started in Germany, and the UK’s NICE recently recommended ILUVIEN be subsidized for some patients with DME. It also has marketing authorization in the Austria, Portugal, France and Spain.

Risk first

Let’s jump straight to the risk before looking at the upside.

pSivida is hoping third time’s the charm. Alimera has submitted  ILUVIEN for FDA approval for a third time. The outcome is expected in October. If rejected, watch out below, pSivida longs will be  crushed. Here’s the crucial point for those looking for better odds. A rejection would make pSivida worthy of attention as it will still have the growing European cash flow, a promising pipeline and the possibility of eventual FDA approval if Alimera coughs up and performs the additional trials the FDA have always wanted. It may also have a share price starting with 1 — ouch!

The prospect of an FDA rejection is why healthcare investors should have pSivida on their radar.

The upside

The upside is large, though probably capped as Bob points out in this article. Capped that is by a juicy takeover by Pfizer (NYSE: PFE) or Bausch & Lomb, respective 10 percent owner and licencee partner on earlier Durasert generations. During analysis, takeovers are a negative for me as they cap the potential upside. So in calculating the upside I’m compelled to leave the possibility of a 10 bagger on the cutting room floor.

If the FDA approves ILUVIEN, pSivida gets a $25 million milestone payment. Not bad for a $86 million market cap company which already has enough cash to see it through most of 2014. But that milestone is just an entree.

The potential sales are large. Although $14 billion in EU sales as suggested in both Bob’s and this article are probably 30 times too high, it is a large market. The current age-related macular degeneration (AMD) market is $3 to $4 billion.

pSivida get 20 percent of profit which they expect to be around 14 percent of sales. Within a couple years the ILUVIEN royalty could match pSivida’s current market cap every year.

There’s more, much more to this story but for now it’s all about FDA approval or not.

The following pipeline from this excellent March presentation is already out of date. With ILUVIEN now marketed, it’s amazing that a pharma company under $100 million has 3 marketed products.

A wee bit more

pSivida has an IND application open for an injectable insert of the same design as ILUVIEN to treat posterior uveitis. According to the CEO the trials will be low cost with a high degree of success. I think his logic is sound. pSivida also has an investigator-sponsored trial ongoing for an injectable bioerodible insert to treat glaucoma and ocular hypertension in collaboration with Pfizer, Inc. 

pSivida’s two FDA-approved products, Retisert and Vitrasert, licensed to Bausch & Lomb, are implants utilizing earlier generations of Durasert technology to treat two other chronic diseases of the retina.

If you want to know more look at this March presentation.

Disclosure: Long PSDV.

This post is for entertainment purposes only and contains no advice.

Last month when posting our sector allocation and position sizing I said,

At one point Telecommunication Service companies comprised over half of our direct equity holdings. Despite reducing exposure to the telco sector over the last six months, the sectors rising tide has made reducing the allocation wonderfully difficult. I will persevere.

And that is just what I did. I’ve persevered in selling down our telco stocks and am now Amcom and M2 free. Thanks for the wonderful ride, I hope I get the chance to own both companies again.

It was pleasing to get some Amcom Telecommunications (ASX: AMM) away at $2.16 and our final parcel of M2 Telecommunications Group (ASX: MTU) at $6.15. I also halved our remaining Telstra Corporation (ASX: TLS) allocation at $5.03. Finally the market decided to join in the selling and I settled for a few lower prices on some of our  remaining telco holdings.

As a reminder here’s our allocation from a month ago.

I’ve mainly been a seller lately though as I’ve commented I couldn’t resist more Maverick Drilling & Exploration (ASX: MAD) below $0.40 this week and there were two other small companies that I couldn’t resist.

Cash up, equities down.

Disclosure: Long Telstra and Maverick.

Fantastic report on disruptive technologies from McKinsey. 12 disruptive technologies highlighted plus a nod to 10 others.

By my count Google is either the number one or a big player in 4 of the 12 technologies. And 7 are key advances on our path to being the Borg!

We estimate that, together, applications of the 12 technologies discussed in the report could have a potential economic impact between $14 trillion and $33 trillion a year in 2025.

To give those figures some reference the worlds current GDP is $70 trillion. Growing at the current 2.7 percent, GDP will increase by $30 trillion to hit $100 trillion in 2025.

I look forward to having my genome sequenced for $100. But I’m concerned for the high paid knowledge workers.

What are they going to do? What will be the impact on over priced Australian city housing?

Knowledge workers comprise 9 percent of global workforce, but take home an out-sized cut of 27 percent of global pay.

Has The Motley Fool called Maverick a Sell?

Investment forum Hot Copper has banned any mention of The Motley Fool on its Maverick Drilling & Exploration forum page due to the Australian investment newsletter’s reputed sell on Maverick.

Wasn’t it only a month ago that head honcho of The Motley Fool Australia Bruce Jackson said

“The addition was to my holding in a company that might be familiar to long-term readers of The Motley Fool — an oil producer called Maverick Drilling & Exploration (ASX: MAD).

It was just over a week ago when Motley Fool Share Advisor — our premium stock picking service — published an exclusive one-on-one interview with Maverick’s executive directors, Don Henrich and Brad Simmons.

This may give you a quick flavour of the interview, and as to why I added to my holding.  As a clue, it’s all about risk versus reward”

I have not seen the sell report and know little about it. But I’m happy to discuss it here. Please comment below.

Anyone know the key points of TMF’s sell call? Who wrote it? Was it part of Share Advisor? Or was this simply Bruce Jackson selling? Please share any details below in the comments. Or contact me via the form at the bottom of this page http://www.fusioninvesting.com/about/

Hot Copper has moderated an entire thread discussing the controversial sell call by The Motley Fool.

This post has been moderated on 21/05/13 13:00 (Copyright)
Comments: how many times do we need to address this issue ?? the organization you refer to is monitoring the thread and reporting copyright violations. Leave this subject alone altogether (entire thread moderated)

As this chart shows the sell call – if that is what it was – by TMF sent the shares in to a tailspin, down 17% on Tuesday and down another 6 percent this morning.

Then the brains at Macquarie Group woke up and realised they were over 2 years late in filing a Notice of ceasing to be a substantial holder. Compounding their idiocy by filing in the middle of a shit storm.

Update on foolish sell recommendation

Motley Fool recommended Motley Fool Share Advisor members still holding shares sell Maverick. The analysis was brief; Maverick is speculative and hasn’t delivered the results TMF had hoped for.

Here is a quote from TMF Share Advisor newsletter.

Since then, the company continues to drill new wells in the hope of drilling success that might turn what appear to be significant reserves into sizeable revenue and profits. As yet, those efforts haven’t delivered the material results we (and the company) had hoped for. Maverick remains at heart a speculative explorer that is hoping for commercial success from its new exploration wells.

As such, it doesn’t really have a place here at Motley Fool Share Advisor, reserved for our ‘best of the best’ stock ideas. We’re recommending Motley Fool Share Advisor members still holding shares sell Maverick Drilling and Exploration (ASX: MAD).

If that TMF sell recommendation caused the 25 percent sell-off then market participants are definitely irrational!

Long Maverick Drilling & Exploration. Longer now.

Buy when others are fearful is my number one rule, or at least first equal. I love it because it actionable. 

So for all those peeps out there buying this market, are you buying from fearful sellers?

Maybe some are, in the occasional stock specific sell-off, but investors buying blue chip, large dividend stocks or telcos right now are not buying from fearful sellers.

The only thing sellers are fearful of is missing out on more gains, and you know what, that’s called greed.

The Australian market could run for a few hundred more points maybe more, but with profit margin stretched above the mean and many blows to global growth looming on the horizon, this is not a great time to buying. Unless you have a decade long time horizon and modest expectations.

I think most individual self directed investors aren’t buying this market. Anecdotally, most buyers are those investing with or advising other people’s money. Anyone got a view on that?

Buy when others are fearful.

I thought it was only financial commentators who loved using the B word. But it seems the boys at UBS just can’t resist playing the bubble card. ‘Welcome to the great bank bubble of 2013‘ says UBS analyst Jonathan Mott.

While there is no formal definition of how far prices need to rise above fundamental value for an asset to be classified as a bubble, past bubbles have results in declines of 40 to 90 percent. I presumptuously doubt Jonathon believes the banks will halve in value from here.

Another characteristic of bubbles is surging prices based on speculation not warranted by the underlying fundamentals. I imagine that is why Jonathon choose to show the Australian banks accumulation index on a linear scale rather than the more appropriate logarithmic scale. See the UBS chart below, via AFR. Linear scales are misleading and grossly exaggerate the magnitude of price moves at higher price points. But hey, if you want to illustrate that banks are in a bubble, that’s the scale to use.

I don’t have access to the UBS data so I’ve created my own based on the four major Australian banks. The first chart uses a linear scale as per the UBS chart. Ooh aah, look at the recent huge surge. Looks scary on a linear scale doesn’t it.

The second chart uses a vastly more appropriate logarithmic scale.

The recent price move doesn’t look so bubbly when correctly viewed through on a logarithmic scale. Yes prices have been surging and yes the four pillars look overvalued, especially CBA, but this is not a bubble.

Will investors get hurt? Of course they will. Any retail investor buying banks year to date are likely to be the sucker at the table. No doubt many will buy high and sell low.

Are banks expensive? Yes, but they are not in a bubble, so please stop using the B word.

Regular readers will know I use a risk reward framework for evaluating equities. My hurdle rate for investments is a return 3 times greater than my expected risk. By my analysis the fours banks, Australia & New Zealand Banking Group (ASX:ANZ), Commonwealth Bank of Australia (ASX:CBA), Westpac Banking Corporation (ASX:WBC), National Australia Bank (ASX:NAB), and Telstra Corporation (ASX: TLS) have an expected risk greater than expected reward.

Despite inferring banks are in a bubble I’ll leave the final word to UBS.

As with all asset bubbles, they can go higher and for longer than many expect. With a solid near term earnings outlook there is nothing stopping the market bidding dividend yields in to ~4.5% (historical lows) implying about 10% share price upside. As Chuck Prince (former CEO of Citi) famously said “As long as the music is playing, you’ve got to get up and dance”. All we can say is buyer beware.

Disclosure: Long Telstra, for a few more minutes at least.

Is yield the new magic number?

Tony Boyd recently wrote an amusing piece for the AFR. I imagine it was a satirical article aimed at mocking all those internet analysts who swapped real metrics and analysis for eyeballs during the internet bubble. Tony opined that the standard valuation multiples and ratios no longer matter and yield is all that counts. He was surely having a laugh as someone of his years wouldn’t fall for the ‘new paradigm‘  fallacy.

I could go on, but let’s simply look at the data.

The price to book ratio of the four pillars — Australia & New Zealand Banking Group (ASX:ANZ), Commonwealth Bank of Australia (ASX:CBA), Westpac Banking Corporation (ASX:WBC), National Australia Bank (ASX:NAB) — is not outlandishly high.

 The current P/B ratio of the four major Australian banks is elevated, but only CBA is approaching bubblicious territory.

It’s crazy to draw conclusions from one financial ratio, but for banks, price to book is definitely my go to metric. The above chart shows what we all know. The four major Australian banks are currently richly valued, but there’s plenty of headroom.

Show me the money

But what about yield? I’m glad you asked, as looking through the yield lens the banks look even less overvalued.

The current yield from 3 of the 4 major Australian banks is in line with the average over the last 20 years. The exception is, of course, CBA. The current yield from ANZ and WBC is close to bang on the long term average, while NAB currently offers a higher yield.

I expect the average yield will remain little changed over the next 20 years. When these yields are grossed up with franking credits it’s highly likely that investing in bank shares will continue to outperform putting money in the bank. Plus, thanks to the power of compounding the actual return should be much higher than cash.

Banking Takeaway

Are the banks in a bubble? No, on that point I agree with Tony Boyd, his yield argument was what amused me. I wouldn’t call it a bubble until they approach a P/B of 3x. To be fair, Tony made several good points in his article; return on equity has fallen due to higher capital requirements, though everyone knew that was going to happen.

Do the banks represent good value? That depends on your time horizon. Over the very long term — a decade or four — buying at this elevated level is still likely to outperform money in the bank. Over the medium and term — 1 to 5 years — a better entry point is sure to arrive and banks outperforming cash is a low probability event. In the short term, go with the momo and could luck. I wouldn’t buy the banks here.

Next time the banks get below a P/B of 1.5x sit up and take notice. I’ll pound the table and back up the truck when that happens, just as I did last time. Maybe next time I’ll even hold on for a tad longer — I suffer from premature selling. In hindsight I sold our ANZ and WBC shares too early and after recently selling Macquarie Group (ASX:MQG) we no longer have any exposure to banking.

Happy investing.

Disclaimer: The views expressed here are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. I hold a driving licence, but that’s about it. I do not hold an AFSL and am not authorised to give financial advice.