A Tale of Two Stocks

Before you skip to the politics part, let me say that there are three reasons I spend so much time writing about BOREF and NTMD.

I am hoping that some of you might be in a position to risk a little money on these bets and in so doing – if we get lucky – cover the cost of your subscription.

Even if you are only following these sagas vicariously, it may conceivably help in assessing other investments and speculations that you encounter, not just these.

I am obsessed. (Let’s be frank.)

BOREF

You know about ‘bid and ask.’ If you’re asking $275,000 for your house and someone offers (bids) $259,000 for it, your house is ‘259 bid, 275 asked.’

Or go to a pawn shop with a $1,500 watch. The dealer may bid $300 for it and then, if you fail to redeem it, ask $900 for it. It is $300 bid, $900 asked at that dealer.

With actively traded stocks, the spread between bid and ask ranges from tiny to teensy – in part because dealers are not involved, most trades are matched all but instantly by computer. The spread may be two or three cents on an actively traded stock – one guy is bidding $16.85 (others are bidding less, but his shows up as the best bid, at $16.85) and another is asking $16.87 (others are asking more, but his shows up as the best asking price) . . . and then along comes someone who puts in a ‘market’ order to buy or sell 200 shares ‘at the market’ – and he will get $16.85 if he’s selling or pay $16.87 if he’s buying . . . unless the market has moved in the last few seconds, as it may have (and certainly will if he’s putting in to buy or sell 200,000 shares instead of 200).

OK? That’s more or less how the modern stock market works. The New York Stock Exchange, NASDAQ . . . billions of shares traded every day . . . no need to go into the details.

Borealis doesn’t trade in the modern market, it trades in ‘the Pink Sheets,’ a throwback to merchants with camels in bazaars, only now they have computers, too.

Because the last reported sale Tuesday was someone buying from a dealer (who was asking $17.50) and the last reported trade Wednesday was someone selling to a dealer (who was bidding $14.50), the reported price dropped from $17.50 to $14.50, down $3, on volume of 6,006 shares. (If that was you with the 6 shares, it’s adorable. I assume you were buying your daughter a $100 lottery ticket? Very sweet.)

There will presumably be people who – mistaking BOREF for a real stock – take fright at this $3 overnight drop (just as they may be excited if tomorrow the last trade is a buy instead of a sell and the stock goes up). In fact, of course, nothing happened.

Nothing has changed from Monday’s column. Moses is still up on the mountain – and may be there for a long time.

Meanwhile, stock of the company’s Chorus Motors subsidiary – which was $10 bid, $16 asked much of the day, and trades even more thinly than Borealis – closed with a last reported trade, coincidentally, of $14.50, also.

As there are 5 million shares of BOREF outstanding . . . it is a pie, that is, divided into 5 million tiny slices, of which your daughter now owns 6 . . . and as BOREF itself owns 5.2 million shares of Chorus Motors (itself a pie divided into about 8 million slices) – each BOREF share owns a little more than one share of Chorus Motors stock.

(Right? In each slice of your Borealis pie there are 5 raisins, an apple chunk, a share of Chorus Motors, some sugar, a share of Power Chips, some cinnamon, a share of Cool Chips, a share of Avto Metals, a share of Roche Bay Mining, and a couple of secret ingredients that, well, who knows what they are.)

So if there were any sense to these prices (and there is very little), it would mean that BOREF closed last night at a value roughly equal to its stake in one of its several subsidiaries, with the rest thrown in for free.

Not to say Chorus Motors is actually worth $14.50 – it will ultimately be worth either much less or much more, I should think. This is only to note that people don’t always make rational decisions in valuing stocks. Because whatever a share of Chorus Motors is worth, a share of Borealis that owns a share of Chorus Motors must be worth more.

And speaking of rational decisions . . .

NTMD

Forget this ‘six thousand and six shares’ silliness – 1,326,184 Nitromed shares traded hands yesterday.

What roiled the waters was a company press release that began this way [emphasis added]:

LEXINGTON, Mass. (August 17, 2005) – Updated heart failure guidelines released on Tuesday by the American College of Cardiology (ACC) and the American Heart Association (AHA) support the combined use of isosorbide dinitrate and hydralazine, now available as a proprietary fixed-dose formulation known as BiDil® (isosorbide dinitrate/hydralazinehydrochloride), as an adjunct to current standard heart failure therapy for black patients. BiDil was recently approved by the U.S. Food and Drug Administration (FDA) and launched by NitroMed, Inc. (NASDAQ:NTMD) in July 2005.

“NitroMed is pleased that these most prestigious groups in the heart failure community – the ACC and the AHA – have recognized the important role that BiDil therapy can play in treating heart failure in self-identified black patients,” said Manuel Worcel, M.D., Chief Medical Officer of NitroMed [who sold 60,000 shares last week].

It went on at some length (and didn’t include my snide bracketed comment), but let me ask you this: would you not conclude from this press release that the just-released report was very good news for BiDil and Nitromed?

There I was on the ledge of my window (from, albeit, a low floor), when it occurred to me to take a look at the actual report.

(In telling the story this way, I am making myself out to be very, very smart. Actually, I have a very, very smart friend who – spying me on the ledge from his penthouse – rang my cell with the URL for the report.)

It is a dense 28-page report in a language I do not understand, and you won’t either, but I know how to use Ctrl-F. Would it surprise you to know, based on your reading of the NTMD press release, that BiDil is nowhere mentioned in the report? Not once? Anywhere? Only the generic combo, available for one sixth the price, is mentioned.

Readers of the press release – which seems to include all the buyers of NTMD on the Yahoo Finance message board – would have taken this report as a reason to hold their shares or buy more.

The stock closed down 48 cents at $19.42, giving the company a market cap of $589 million.

COMPARE

So the market, which gives you endless choices every day, gives you this one:

You can pay $589 million for a company that has a single product it sells for six times as much as the generic alternative.

Or . . .

You can pay $88 million for a company that owns several subsidiaries it claims to be hugely valuable, including one that claims to have an electric motor so powerful and revolutionary that – the size of a watermelon – it can drive a jumbo jet around the tarmac like a golf cart . . . a capability now vouched for by both Boeing and the chief pilot of Air Canada.

Anything can happen. (Truly!) But if I were allowed just one tiny change to make more sense of those two paragraphs, I would switch the $589 and the $88. It remains to be seen whether, in time, the market will do that for us.

Tomorrow (I hope): Back to Politics!