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A Look at LeapFrog … and Our Croatia Connection

I was on the phone with Permanent Wealth Investor Editor Martin Hutchinson on Monday when he related a story that I just had to share with you.

Martin and I were taking advantage of the stock-market holiday to review some of the recommendations he's made to Private Briefing subscribers. We started off with Galapagos NV (PINK ADR: GLPYY), the Belgium-based biotech venture whose shares have risen as much as 205% from where Martin recommended the company.

In one of the announcements it made last week, the company said that its research site in Zagreb, Croatia would form the basis of a newly created service division, which the company is referring to as Fidelta.

Galapagos acquired the Zagreb operation in September 2010 from GlaxoSmithKline PLC (NYSE ADR: GSK), which had run it as a research center. By refocusing Fidelta, Galapagos transforms it into a drug-discovery company that will specialize in inflammation, infectious, metabolic, and oncology diseases.

The announcement struck a chord with Martin, who worked in Croatia during his global merchant banker days. I have to confess that I'd forgotten about that when I last wrote about Galapagos.

In the six years that I've worked with Martin, I've probably recounted several dozen times (in columns, in interviews, in promotional letters and at cocktail parties) the story of how Martin "fixed" the economy of Macedonia. It is a pretty remarkable tale.

But I'd forgotten that he provided some equally impressive assistance in Croatia, where he worked from 1996 to 2000 – first as U.S. Treasury Advisor to the Croatian Finance Ministry and then as the head of corporate finance for Privredna Banka Zagreb.

It's due to that time spent in Croatia that Martin is able to tell us how much he likes the move Galapagos is making in Zagreb.

"You see, Bill, when I was there in Croatia, the best company in the country was Pliva – an excellent Pharma company which had the University of Zagreb turning out really good research scientists," Martin explained. "And when I say "really good," I'm talking really good at the international level. These scientists were trained differently than their counterparts in U.S. labs, which meant they had a better chance of finding new and original stuff. So it was a very good situation, and a nice strength for Croatia's economy."

But the situation changed after Martin ended his advisory work in Croatia – and had, in fact, left the country. He'd really enjoyed his time in Eastern Europe, but the market had undergone a drastic change – and not for the better.

"By that time, Western banks had taken everyone over, and installed their own people," Martin said. "Since there were no longer any fun jobs in Eastern European banking, I came back to the United States and turned into journalist with UPI."

But he continued to follow some of the great companies – and intriguing investment plays – that he'd become acquainted with during his stint in Eastern Europe.

And one of those "great companies" that he continued to watch was Pliva.

"After I'd left, and was no longer working as an advisor, Pliva was sold to Israel's Teva Pharmaceuticals." Martin said. "I knew it wasn't going to be a good fit – in fact, had I still been an advisor to Croatia, I would have told the government not to let the deal happen. Ultimately, Teva shuttered Pliva's R&D operation, which dumped a great many researchers into the marketplace. Obviously, Galapagos figured out that Zagreb is full of very smart, underemployed pharma researchers. And now it's going to capitalize. All I can say to that is … well done!"

Recommended back on Aug. 11, 2011 – on our first day of publication – Galapagos has also been our single-biggest winner, with a peak gain of 205%. We believe there's more to come – lots more, in fact.

Almost immediately after we published our Jan. 17 update on Galapagos – in which we highlighted this pick as our first "triple" – Private Briefing subscriber B.R. told us he bought the stock in March, and has gained 68% since.

B.R. said he also has a 28% gain on LeapFrog Enterprises Inc. (NYSE: LF), the maker of educational toys for kids that we recommended on Oct. 1. The stock sold off a bit following our recommendation, but then rebounded strongly and, as of Friday's close, was up 9.58%.

After disappointing investors several times in recent years, LeapFrog looks like it's finally on the right track.

According to the Retail Tracking Service of NPD Group, LeapFrog products took three of the Top Four spots on the list of the "Best-Selling Toys of 2012." The LeapPad Explorer, LeapPad2 tablet, and Explorer-licensed software were the three products cited. You have to think that will translate into strong results when the company reports its holiday-quarter and year-end results on Feb. 6.

That certainly seems to be the thinking among investors: With Thursday's close, LeapFrog shares closed higher for the 10th consecutive trading session – a highly impressive winning streak that was ended with a small reversal on Friday.

And the company has been growing: Revenue for the last quarter was $193 million – up 28%. The forward Price/Earnings (P/E) ratio is 11.6. And the consensus target price for LeapFrog right now is $14 to $15 (depending on the source). That would represent a gain of either 42% or 52% from where the shares closed on Friday – a hefty profit in either case.

Current View: Both Galapagos and LeapFrog continue to be "Buys."

[Editor's Note: Galapagos' U.S. shares are somewhat thinly traded. But don't let that scare you off. If you buy the U.S. shares, just be sure to use limit orders to purchase at the price you desire.The stock is also actively traded on the Brussels exchange – about 66,000 shares a day, Martin says. Check with your broker to see if it allows U.S. investors to buy shares abroad.And remember, we recommend investors employ "trailing stops" – generally 25% – on all holdings. If you have an exceptionally large gain in Galapagos, consider a wider-than-usual trailing stop of 30%, Martin says.]

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