"You can invest for all the right reasons and still get the wrong result," notes long-standing turnaround stock expert George Putnam, referring to the poor performance of the pharmaceutical sector in recent years.
Here, in his industry-leading The Turnaround Letter, he offers a fascinating review of 10 leading drug stocks which he now believes offer a combination of growth potential at "pretty cheap" valuations. Here is his overview.
"In 2000 and 2001, when the Internet boom was becoming a bust, many smart investors turned away from technology stocks and put their money into drug stocks. How could you go wrong with the big pharmaceutical companies?
"Demand for their products was growing as the population aged. These companies had huge research and development programs that seemed to keep cranking out new blockbuster drugs. And most of them had great balance sheets, with many paying handsome dividends.
"Much of this reasoning has been borne out in the intervening years. Many large drug manufacturers have rung up substantial revenue gains over the last decade. So what's happened to the big drug stocks? With few exceptions they have gone sideways or down – in some cases down a lot.
After hitting a one-year high of $54.64 in January, the stock hit a one-year low of $40.51 in March. This morning, GSK opened at $43.76. So far today the stock has hit a low of $43.57 and a high of $44.01. As of 12:30, GSK is trading at $43.78, down $0.71 (-1.6%). The chart for GSK looks bullish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a July bear-call credit spread above the $47.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in eight weeks as long as GSK is below $47.50 at July expiration. Glaxo would have to rise by more than 8% before we would start to lose money. Learn more about this type of trade here.
Deutsche Bank cut Anheuser-Busch Companies Inc (NYSE: BUD) to Hold from Buy on valuation following the recent rally spurred by takeover speculation. The firm believes the reported $65/share cash takeover offer by Inbev requires aggressive cost reduction and could harm the brands.
Morgan Stanley downgraded shares of GlaxoSmithKline Plc (NYSE: GSK) to Underweight from Equal Weight as they see risk to Street expectations for a U.S. Cervarix approval in 2009.
In a move to help turnaround its troubled business, General Electric Company (NYSE: GE) will sell or divest its appliance division, and could expect to receive between $5B and $8B for the unit, according to the Wall Street Journal. Potential buyers appliance makers BSH Bosch & Siemens Hausger of Germany and Haier Group of China, as well as private equity firms and Controladora Mabe, GE's partner in Mexico.
The Wall Street Journal also reported that Comcast Corporation (NASDAQ: CMCSA) will acquire Plaxo, a networking Web site, in an effort to increase its range of services. Terms of the deal were not disclosed.
To help improve its Ask.com search engine, the Wall Street Journal reported that IAC/InterActiveCorp (NASDAQ: IACI) will buy the Lexico Publishing Group, which owns Dictionary.com, Thesaurus.com and Reference.com.
WEB SITES:
Citing the New England Journal of Medicine, Bloomberg reported that migraine headache medicines, including Merck & Co Inc's (NYSE: MRK) Maxalt and GlaxoSmithKline Plc's (NYSE: GSK) Imitrex caused potentially fatal reactions in at least 11 people. The Journal said people using "triptans," an older class of migraine drugs, could develop serotonin syndrome, which may cause fever, shock, vomiting and rapid heartbeat.
Day one of the two-day FDA Anesthetic/Life Support Drugs & Drug Safety/Risk Management Advisory Committees meeting: Purdue Pharma's NDA for Oxycontin.
Anadarko Petroleum (NYSE:APC) to report Q1 earnings; conference call Tuesday at 10:00am.
Tuesday, May 6
Day two of the two-day FDA Anesthetic/Life Support Drugs & Drug Safety/Risk Mgmt Advisory Committees meeting: Cephalon's (NASDAQ:CEPH) sNDA for Fentora.
Molson Coors (NYSE:TAP) to report Q1 earnings; conference call at 12:00pm.
GlaxoSmithKline (NYSE: GSK) shares are trading higher after the Food and Drug Administration approved GSK's Advair Diskus 250/50 for the reduction of exacerbations in patients with chronic obstructive pulmonary disease (COPD). Advair is now the only FDA-approved treatment for the reduction of COPD exacerbations. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on GSK.
After hitting a one-year high of $58.33 last May, the stock hit a one-year low of $40.51 in March. GSK opened this morning at $44.51. So far today the stock has hit a low of $44.42 and a high of $44.85. As of 12:35, GSK is trading at $44.61, up 0.50 (1.1%). The chart for GSK looks bullish and steady, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bullish hedged play on this stock, I would consider an August bull-put credit spread below the $37.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just three and a half months as long as GSK is above $37.50 at August expiration. GSK would have to fall by more than 15% before we would start to lose money. Learn more about this type of trade here.
GSK hasn't been below $40 at all in the past year and has shown support around $42.50 recently. This trade could be risky if one of the company's drugs runs afoul of the FDA, but even if that happens, that position could be protected by support the stock might find just above $41, where it bottomed out in March.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in GSK.
MOST NOTEWORTHY: AbitibiBowater, GlaxoSmithKline, AstraZeneca and Capital One were today's noteworthy downgrades:
Lehman downgraded AbitibiBowater (NYSE: ABH) to Equal Weight from Overweight citing dilution from the recent $350M convertible offering, cost pressures, and a more cautious outlook near-term for pulp markets.
JP Morgan cut GlaxoSmithKline (NYSE: GSK) and AstraZeneca (NYSE: AZN) to Underweight from Neutral on long-term earnings growth concerns.
Keefe Bruyette lowered Capital One (NYSE: COF) to Underperform from Market Perform to reflect the company's credit outlook.
OTHER DOWNGRADES:
Nokia (NYSE: NOK) was downgraded to Neutral from Buy at UBS and to Underweight from Overweight at JP Morgan.
Textron (NYSE: TXT) was cut at Credit Suisse to Neutral from Outperform.
MOST NOTEWORTHY: GlaxoSmithKline, FreeSeas and SINA Corp were today's noteworthy initiations:
ING believes GlaxoSmithKline (NYSE: GSK) should benefit from the appointment of Andrew Witty as CEO and see limited downside risks. The firm initiated shares with a Buy rating.
FreeSeas (NASDAQ: FREE) was started at Oppenheimer with an Outperform rating and $8 target, as they view FREE as an early stage growth company in the smaller dry-bulk vessel segment and finds the valuation attractive at current levels.
Kaufman Bros. initiated SINA Corp (NASDAQ: SINA) with a Buy rating and $4.50 target, and believes China represents a compelling long-term growth opportunity.
OTHER INITIATIONS:
Level 3 Comm (NASDAQ: LVLT) was initiated with a Underperform rating at Wachovia.
Jefferies assumed Savient Pharma (NASDAQ: SVNT) with a Buy rating and $30 target.
Lehman initiated Brown & Brown (NYSE: BRO) with an Underweight rating.
Throughout his career, Warren Buffett has generally -- and wisely -- refrained from making broad economic predictions, instead applying a bottom-up approach to his analysis.
But that doesn't stop the Oracle of Omaha from calling a spade a spade and, speaking on CNBC this morning, Buffett said that the United States economy is in a recession even if it doesn't technically meet the criteria. He said that the economy is in a recession "by any commonsense definition."
Economists define a recession as being two consecutive quarters of negative gross domestic product growth.
It's worth noting, however, that his grim assessment of the current state of the economy aside, he continues to invest aggressively in stocks he believes are undervalued. Last month, he became the largest shareholder in Kraft (NYSE: KFT) and also picked up shares of GlaxoSmithKline (NYSE: GSK).
The point is that investors seeking to emulate Buffett probably shouldn't be scared away from stocks by broad macroeconomic trends. Recession or no, Warren Buffett invests zealously in companies he believes in.
You know the old adage for success in the stock market -- buy low and sell high. Well unfortunately too many Americans today are doing the exact opposite as they seek coverage from a very volatile stock market. They bought when this market was near the top and are now selling in panic.
I prefer to watch two men who clearly know how to buy low and sell high -- Warren Buffett (also known as the "Oracle of Omaha" and Bill Miller, a very successful fund manager at Legg Mason, who is known for his 15-year winning streak against the Standard & Poor's 500 stock index.
So are they selling or buying? Both are buying and buying big. According to Sunday's Washington Post, Buffett upped his stake in Kraft Foods (NYSE: KFT), Johnson & Johnson (NYSE: JNJ), U.S. Bancorp (NYSE: USB), and Wells Fargo (NYSE: WFC). He also took a new stake in GlaxoSmithKline (NYSE: GSK). Buffett disclosed that he owns 132 million shares in Kraft, which means he owns 8.6% in the maker of Ritz crackers, Philadelphia cream cheese, and Maxwell House coffee.
Vivian Lewis, who holds GSK in her Global Investing portfolio, explains, "GlaxoSmithKline is off 22% since our purchase late in 2006, so how nice that the Oracle of Omaha sprung for it now. Why did he?
1) The stock has a a 4.5% yield, always nice. Buffett is a value player, not a growth man, especially in the current economy. Drugs are refuges in a downturn;
2) A recently defused scandal over its lead drug, diabetes treatment Avandia, whose nasty side-effects (heart trouble) surprised doctors and researchers. The heart trouble also affects competing diabetes drugs, result of too-rigorous attempts to 'normalize' blood sugar levels. There will be lawsuits but they ignore the fact that the side-effect was unanticipated;
MOST NOTEWORTHY: Level 3 Communications, BT Group and Limited Brands were today's noteworthy downgrades:
Merriman downgraded shares of Level 3 Communications Inc (NASDAQ: LVLT) to Neutral from Buy, as they believe the risks outweigh the rewards until the company can complete its integration and turn FCF positive.
BT Group Plc (NYSE: BT) was downgraded to Equal Weight from Overweight at Lehman to reflect the company's slowing revenue growth.
Bear downgraded Limited Brands Inc (NYSE: LTD) to Peer Perform from Outperform, citing the unfavorable macro backdrop, execution issues and management turnover.
OTHER DOWNGRADES:
Societe Generale lowered its rating on GlaxoSmithKline Plc (NYSE: GSK) to Hold from Buy.
Morgan Stanley downgraded Cox Radio Inc (NYSE: CXR) to Equal Weight from Overweight.
GSK reported a declining Q4 pre-tax profit and warned 2008 earnings will be negatively affected by decreasing sales of diabetes drug Avandia, competition from generics and a weak dollar.
GSK overall option implied volatility of 26 is near its 26-week average according to Track Data, suggesting non-directional risk.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
The Wall Street Journal reported that IAC/InterActiveCorp's (NASDAQ: IACI) CEO Barry Diller is in talks with outside investors or possible buyers for all four companies that he plans to spin off, according to a person familiar with the situation.
According to a source close to Yahoo! Inc (NASDAQ: YHOO), CEO Jerry Yang has decided to go forward with layoffs at the company. The source said that the layoffs will come in the 1,500-2,000 range instead of the "hundreds" reported elsewhere, the Silicon Alley Insider reported.
"You can invest for all the right reasons and still get the wrong result," notes long-standing turnaround stock expert George Putnam, referring to the poor performance of the pharmaceutical sector in recent years.
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