Author Archive

  • The Fall of the Big Drug Stocks
    , August 20th, 2005 at 9:10 pm

    One of the most surprising developments in recent years has been the market-lagging behavior of the major drug stocks. The pharmaceutical industry is dominated by a small number of very large companies. For years, these stocks have been outstanding performers. They’ve been steady growers with fairly predictable earnings growth.

    In short, there are eight major American drug companies: Merck, Pfizer, Bristol Myers, Johnson & Johnson, Eli Lily, Wyeth, Schering Plough and Abbott Labs. Four of the eight are based in New Jersey.

    The industry has occasionally faltered. Once in the early 1970’s and again after Bill Clinton was elected in the early 1990’s. Once the Clinton health care plan was defeated, the industry hit bottom and started to rally very strongly. But this recent downdraft seems quite different. I’m afraid it might not be a transient sell-off, but a larger trend against drug stocks.

    For 15 years, Schering-Plough was the best-performing drug stock, but it started trailing the market in 1998. The company lost money in 2003 and 2004, and the stock is now lower than it was eight years ago.

    Pound-for-pound, Bristol Myers has been the weakest-performing major drug stock. Still, it’s done very well for investors. The stock started underperforming the market only four years ago. Since 1982, BMY is up over 1,400% including dividends (according to Yahoo’s very unreliable numbers).

    Wyeth, which used to be American Home Products, has performed remarkably similar to Bristol Myers. The stock has trailed the broader market over the past four years, but not as sharply as BMY. The stock is up over 2,100% since 1982.

    Merck’s performance is probably the most surprising. The company was the gold standard of the drug companies. It was conservative and consistent. The company lost some glamour as it was overtaken by Pfizer in recent years. The worst news of late has been Vioxx. Last year, Merck took a massive hit when it decided to stop selling the drug. On September 30, the day of the announcement, the stock dropped 27%. Over 145 million shares were traded that day.

    Up until late-2000, Merck had been a constant market beater. The stock was a huge winner in the 1980’s. It fell sharply in 1992-94 period, but it turned around impressively. Since 1982, shares of Merck are up over 2,000%.

    Pfizer was actually the worst stock in the bunch until 1990. By worst, I mean it merely kept pace with the S&P 500, it didn’t dramatically beat it. Then, in 1990 Pfizer suddenly became a market star. It fell during the 1992-94 period, but not as bad as the others. Once the dust settled, Pfizer took off. Thanks to Viagra, Pfizer soared over 1,000% in just five years.

    Pfzier started trailing the market four years ago, but it’s gotten much worse in the past 15 months. The stock is down over 33% since last year’s high. Since 1982, Pfizer is up over 3,600%.

    Eli Lilly is the toughest stock to figure out. The stock was a big winner in the 1980’s, but it was hit hard in the 1992-94 sell-off. The stock recovered and started to lead the market again. Since 1997, however, Lily hasn’t has any real trend. Over the last few years, the stock has been very volatile and the market doesn’t seem to know what to make of it.

    Johnson & Johnson and Abbott Labs have performed remarkably the same. The stocks track each other like waltzing partners. The big difference is that they’re both involved in other health care markets. That’s why they’re the most stable of the drug stocks and these two are the only ones that have done well in recent years. JNJ has actually beaten the market over the past year. It’s also the biggest winner since 1982. Shares of JNJ have gained over 4,000%.

    Analysts expect JNJ, Lily and Abbott Labs to grow their earnings at a 10% rate for the next five years. That strikes me a very subdued. But the other stocks are even worse. Analysts expect 8% growth from Merck, 6.5% from Pfizer and just 4.5% from Bristol Myers. Schering Plough has the highest at 20.5%, but I suspect that’s because its earnings have been so poor lately.

    Even after the lousy stock performances, I still think that many of these stocks are simply too expensive. This is still very baffling to me. I like to think that stocks can stay big winners for several years, but all things must change. For now, I’d steer clear of the entire sector.

  • Investors Want Dividends
    , August 20th, 2005 at 5:00 pm

    With all this cash building up, investors are demanding higher dividends. Personally, I’d like to see higher dividend payments. The reason is very simple: Give investors the decision to buy back stock, don’t do it automatically.

    Dividend payments do fluctuate over time, but today’s dividend yields are weak by historical standards. The historical dividend yield for the Standard & Poor’s 500 is roughly 4 percent; the yield in July was a pale 1.70 percent. Justifying such a low yield isn’t easy when companies in the index are sitting on a near-record $621.7 billion in cash.
    Investors used to count on dividends for much of their returns. In the 1930s through the ’50s, dividends were 60 percent to 80 percent of investors’ returns, Eby said. In the 1970s, dividends were 70 percent of stocks’ total return, Irving said.
    Dividends waned in the 1990s when upstart companies with no profits couldn’t afford to pay them, and growing technology companies argued that their money was better spent investing in the business or buying competitors.

    There are many benefits of higher dividends. Higher dividends reduce a stock’s volatility and make it easier to value the stock.

  • Not All Index Funds are Equal
    , August 18th, 2005 at 3:05 pm

    Here’s a good point to remember: Not all index funds are alike.

  • Fair Isaac
    , August 18th, 2005 at 2:57 pm

    One of my favorite stocks is Fair Isaac (FIC). Although most people have never heard of this company, they live in dreaded fear of them. Have you wondered about your “credit score”? Fair Isaac is the company that keeps watch over you and your borrowing habits. The company’s FICO score is the dominant credit-rating formula used by lenders. If you want, you can find out your score at www.myfico.com.

    Since Fair Isaac is so dominant in its industry, it can maintain a pretty high profit margin. About 15 cents of every sale makes its way to the bottom line. Fair Isaac said it expects to earning $1.83 a share for its fiscal year, which ends in September. That means that FIC is trading for about 21 times earnings.

    I’m exactly sure how to categorize Fair Isaac. It’s not really a tech stock, nor is it financial services. The stock struggled last year, but seems to be back on track. The company has a market value of about $2.5 billion and it’s a member of the S&P 400 Mid-Cap Index.

  • RBS to Invest in the Bank of China
    , August 18th, 2005 at 2:18 pm

    Americans may freak out that the Chinese want to buy American companies, but the Chinese don’t seem so bothered by foreign investment. The Royal Bank of Scotland is leading a group of investors that’s buying a 10% stake of the Bank of China. RBS is taking 5%, and they’ll manage another 5% on behalf of their partners, Merrill Lynch and Li Ka-shing.

    The deal, which is subject to regulatory approval, will give RBS access to a bank with 11,307 branches, a 12 percent share of the loans market in mainland China and 14 percent of the savings market.

    I’m glad to see some countries embrace capitalism, even if they’re Communist.

  • A Micro-cap Exchange Traded Fund
    , August 18th, 2005 at 10:39 am

    Shares of PowerShares Zacks Micro Cap Portfolio, the first micro-cap ETF, made their market debut today. The ETF trades under the symbol PZI. The index is made up of over 300 stocks with very low market values. Micro-caps are historically the best-performing sector of the market. The problem with small issues is diversity and liquidity. That’s why I like this ETF. Here’s the press release.

  • India’s New Worldly Women
    , August 18th, 2005 at 10:26 am

    Business Week has an interesting article about the changing status of women in India. A research survey found surprising attitudes among younger women:

    Now many women say they’ll marry when ready — not when their parents decide to marry them off. Sixty-five percent say dating is essential, and they also want to become financially independent before they marry. More than three-quarters — 76% — say they want to maintain that independence afterward. Sixty percent say they’ll decide how to spend their own salaries.

    I think this is very encouraging. India’s path to economic integration will probably be much smoother than many other countries, particularly China.

  • Google Watch
    , August 18th, 2005 at 9:49 am

    One year after raising a truckload of money in their IPO, Google is going back for more. The company just filed to sell 14.1 million shares of stock. At today’s price, that’s over $4 billion.

    This time, the Google Dolls are going the conventional route. Instead of a Dutch auction, the offering is going to be headed by Morgan Stanley and Credit Suisse First Boston, with Allen & Co. along for the ride. The companies will probably rake in about $150 million from the deal. The underwriters also have the option of buying up 600,000 shares to cover over-allotments.

    I was impressed by this quote:

    “It’s something I wasn’t anticipating,” said Jeffrey Matthews, a partner at Ram Partners LP in Greenwich, Connecticut. The firm owns the shares. “They don’t need the money. Apparently they want more. Fourteen million shares will depress the price.”

    That’s right—they don’t need the money. It’s simply a money grab. At a certain level, I’m a bit impressed. But what will they do with the money? Are they planning a major buyout? Google already has $3 billion in cash. Who knows what they’ll do. Google already owns a nice chunk of Baidu. They could buy the rest without dipping into cash flow. Maybe they’ll bid for Unocal!

    What bothers me is that I never have any idea what they’re doing. The company treats its shareholders horribly. Instead of the being vanguards of the new economy, Google is weird and overly secretive which hints at paranoia.

    Institutional Shareholder Services has a corporate governance rating system. Google got one of the lowest scores ever, just 4.2 on a scale of 1 to 100. Google has a two-tiered share structure, no outside directors and offers no guidance. I’m sure after the stock plunges, some retiree will tearfully tell a Senate subcommittee that they had no idea how Google treated its owners.

  • A Turnaround at HP?
    , August 17th, 2005 at 7:03 pm

    I’m not particularly impressed with Hewlett-Packard’s earnings. The company earned 36 cents a share last quarter, five cents more than expectations.

    The company’s personal computer division, which had lost money in the not-so-distant past, earned $163 million in the third quarter – “despite the fact that this is our seasonally weakest quarter,” Mr. Hurd said. The company reported a profit margin of 2.6 percent in its personal computer division, its best in years.

    That’s still not too good. Some on the Street seem impressed that HP’s earnings grew five times faster than its sales. Yes, that’s true, but only because the company has undertaken dramatic cost-cutting measures. Do you ever notice that Dell never announces a “major cost-cutting initiative”? It’s because they’re always looking out for ways to keep costs down.

    HP still has a long way to go. Dell is the best PC-maker in the business.

  • Mr. Housing Bubble
    , August 16th, 2005 at 6:35 pm

    Mr. Housing Bubble to the rescue. Although, he has enemies!