TAKING STOCK: Chimerix and margin accounts

Dear Mr. Berko:

Please tell me about Chimerix, which sells for $42. My broker says this is an "excellent speculative stock," and he's very enthusiastic about it. He wants his clients to own it and wants me to buy 1,000 shares on margin. Please explain margin, as I don't understand how it works. My individual retirement account is worth $191,000. He suggests that I borrow $42,000 from his brokerage, using the stocks in my $191,000 IRA as collateral, and then buy 1,000 shares of Chimerix, which he believes will double in less than a year.

-NC, Port Charlotte, Fla.

Dear NC:

I think this jerk ought to get a job cutting holes in Swiss cheese. This wouldn't be a suitable investment for you.

Chimerix (CMRX-$42) is among the thousands of biopharmaceutical companies that develop, discover and commercialize unique antivirals and then search the world for new diseases their drugs can cure. CMRX came public at $15 in early 2013 with zero revenues, rising steadily to $24 12 months later. Then, as the Ebola virus started making headlines worldwide, frenzied traders began circling CMRX, pushing it above $42. They suggest that its new antiviral, Brincidofovir, will cure the Ebola curse.

But CMRX, like most of these development-stage biopharmaceuticals, has significant overhead costs (staff, rent, utilities, equipment, etc.) and burns through money like the Pentagon. Last November, CMRX had to raise $105 million of new money via a secondary offering of 2.5 million shares. How can a company with hundreds of millions in losses have a market cap of $1.55 billion (37 million shares times $42)?

Now, each of the seven analysts who follow CMRX rates it a "buy." But I know two of them, and I don't respect their new metrics. It seems the "old math" used by Benjamin Graham and David Dodd (revenues, profit and loss statements, and balance sheets) is too conservative for today's analysts. Still, in my way of thinking, investment decisions without Graham and Dodd's data are like driving eastbound in the westbound lanes on an LA freeway-at night.

Even if you're still gung-ho on CMRX, I wouldn't buy 1,000 shares, especially on margin. Consider selling some of your weak issues and buying 200 shares of CMRX with cash. Using margin (leverage) allows you to increase your share position, but the flip side of the coin is you can also increase your losses. I won't object to a 200-share CMRX speculation, but buying 1,000 shares would be excessive for a $191,000 portfolio. I believe that your broker has cranial leptospirosis.

The brokerage industry, searching for new revenue sources, encourages brokers to push margin accounts, which are securities-based loans. Bank of America Merrill Lynch, with 14,500 stockbrokers, is the largest securities lender on the Street. And to encourage its people to open loan accounts, Merrill told its covey of brokers that it would double their base payout for new assets in 2015. At the end of the year, that will be a lot of moola. Meanwhile, UBS, Morgan Stanley and Wells Fargo are also encouraging their brokers to offer margin accounts to their clients. And they, too, will double their brokers' commissions. Margin accounts create more risk in a client's portfolio. So when markets decline, many of these clients could be up the river without a paddle.

Opening a margin account is a simple process. Just sign a couple of standard forms, called a loan agreement, prepared en masse by slick Wall Street lawyers earning $1,200 an hour. Don't bother reading the agreement, because you're not supposed to understand it. After signing the papers and pledging your retirement comfort, the brokerage can immediately lend you 50 percent of the account's market value. In this instance, you have the capacity to borrow (50 percent of $191,000) $95,500. So if you were to purchase 1,000 shares of CMRX at $42, the broker would lend you $42,000 using your $191,000 account as collateral. Your account would then have a market value of ($191,000 plus $42,000) $233,000, but you would owe the broker $42,000. And for the privilege of borrowing $42,000 from your broker, even discount brokerages such as Charles Schwab charge rip-off interest costs of at least 8 percent. Subprime car loans are cheaper than that.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

©Copyright 2015 Creators.com

Published: Thu, Mar 19, 2015

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