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meleke's picture
big pharma

Like most of you I've been tempted by the value investing approach.

So, where do you find value nowadays?

You can find it in micro-cap stocks, but note that as J. Piotroski (my heroSmile) demostrated long ago only about 40% of under-valued stocks (price/book value) go up, and most of them just go from cheap to cheaper to even cheaper.

You can find good multiples (p/e, p/s, p/bv) in energy and commodities stocks, as well. But, as J.Mauldin often reminds us, people like to extrapolate past trends in the future until infinite. I don't believe the earnings growth we've seen in energy, copper, gold, etc will last forever. Add homebuilders here, if you want.

So, I like companies with excellent track records (profitability, earnings strenght, good cash flows, and strong balance sheets) and good prices.

I believe that big pharma fits what I'm looking for. They're not really cheap. But they are really good companies.

If you have the chance go to bigcharts.com and type BMY (Bristol Myers). Go to java chart and add rolling eps and p/e ratios.
What you will see is:
1. a falling stock (long term)
2. earnings that go nowhere but up
and therefore:
a falling p/e ratio that delivers the cheapest BMY in years.

Sure it can go cheaper. But a 5% dividend yield helps to stand up in bad times.

I will be pleased to hear your opinions.

Sorry if I don't write as properly as it should. This is not my language.

Best regards.

meleke
spain

 
By meleke at 2006-02-22 13:06 | Stocks | BMY | meleke's blog


Big Pharma fan...

How do you define cheap? Relative to historical P/Es, big pharma like JNJ, Pfizer are cheap. They haven't been this "cheap" since the Hillary Clinton healthcare scare.  So, for many people it's a good buying opportunity for companies with amazing profit margins, strong cash flows, and relative monopolies. Not bad.. The downside is their success is dependent on their R&D pipeline. Can you predict/guarantee that you'll come up with 5 blockbuster drugs in the next 3 years? You can't really control creativity and discovery. It's just happens... and hopefully, it happens before you run out of money from your patented drugs (Cash cows)... So, for the most part, the big pharma bet is predicated on faith... and faith alone.. do you believe they can revitalize their pipelines? Hmmm.... I've bet yes in my personal account. But, only time will tell.

By schin at Wed, 2006-02-22 20:44 | login or register to post comments

Moved to Blog

Meleke,

I moved this posting to your blog because the forums are mainly for members to discuss the StokBlogs project in general (bugs, usability questions, feature requests, etc), and not stocks or investing.  Rather, members should use their own blogs to post about investing ideas.  Please contact me if you have any issues with this.

RE: Big Pharma
Thanks for pointing out that BMY has a 5% dividend yield.  That, to me, is rather large and attractive.  I would have to agree with schin that big pharma is a big leap of faith as to whether they can keep pumping out blockbusters.  But I too would bet yes.  They are cash cows, have a history of producing blockbusters, and have the money to buy growth if necessary.

-theo

PS - I also categorized this blog posting under the symbol 'BMY'.  You can change that anytime Meleke.

PPS - Don't worry about your English, it is very clear  =)
By Theo at Wed, 2006-02-22 21:49 | login or register to post comments

BMY risks?

I haven't looked at pharma companies very much, so I don't have the best understanding.

I have also been tempted by BMY over the last year. Getting paid a 5% dividend does ease the pain of waiting - more so if you do your homework and buy it at a good price so you can expect price appreciation. However, if the business deteriorates it's possible that they could be forced to cut the dividend. I have avoided BMY so far because I haven't been able to recognize (or maybe understand) it as a grand slam yet.

RE: drug pipeline - Fortunately, the large drug companies have been able to boost their drug development pipelines by acquiring drugs from smaller pharmas and by development partnerships with other companies. As long as they have cash in the bank they will be able to continue to buy "options" on the drugs developed by the smaller drug companies. So that gives them some flexibility. 

Unfortunately, I think many people these days are over-optimistic about bonds and dividends and are chasing the highest yields - assuming that they will always be paid off. Companies can default on bonds, companies do cut dividends. If we enter a recession a lot of people in marginal investments will be taught a lesson. I don't necessarily think that the case with BMY, but there are a lot of people in the market chasing these returns who would do well to read some financial history.

That dividend would also look a lot less appealing if the inflation continues and interest rates keeps rising. I believe that inflation is being understated with the Fed's CORE CPI calculations. Higher oil and commodity prices will eventually trickle through the economy as price increases. It's just a matter of when the Fed is willing to recognize it.

I wonder what major risks BMY faces? I would worry that the US govt would eventually try to squeeze pharma margins in an effort to reduce health care expenses. This may not effect the profits of the pharmas much - since prescription drug use is ballooning and the baby boomer demographic bubble favors growth over the next 20 years as well.
By Pat at Thu, 2006-02-23 04:25 | login or register to post comments