Saturday, April 4, 2009

Bought ABT and PGN/Obama Misleads on Projected Budget Deficits/

The ISM report on the strength for the service sector was 40.8 for March, still indicating contraction. Yahoo! Finance

This is a link to an interesting chart showing how closely this bear market is tracking the 1929 crash, and how it compares to other bear markets from the past. dshort.com: Bear Markets Since 1950
According to this chart from the same source dshort.com: Bear Markets Since 1950,
the S & P 500 index is up 24.5% from its recent March low, about the same as the last bear market rally in December which was a 24.2% gain before continuing the slide. At the low in March, the index was down 56.8% since the bear market started at a high of 1565.15 on 10/09/2007. This chart simply puts the past in some perspective and is not intended to be a prediction of the future course of events. For me, the current rally has been enough to take me back to where I started the year.

Since no one knows yet whether the current rally is a replay of the December 2008 bear market rally, although it does have a different feel to it, my reaction is to sell some non-dividend paying stocks into the rally and to substitute for them companies that pay decent dividends which hopefully are secure, at least for now. I started to perform this substitution last week.

Abbott Labs (ABT) was bought at 44.19 in the Roth IRA to replace KXI which was sold recently. The dividend yield at that price is close to 4%.

In my main account I added 30 shares of PGN to my existing holdings at $35.77. The dividend yield is around 7% at that price. PGN Stock Quote - Progress Energy Inc Stock Quote - PGN Quote - PGN Stock Price Earlier this year, I sold the same number of shares in an IRA at a profit with the intention of buying those shares back in the main account in order to consolidate my position in PGN in one account.

Abbott is a new position for me. It held up well in the bear market but has not participated in the recent rally. ABT has fallen a couple bucks since early March and from around 53 at the start of the year. Prior to this year, the stock traded in a narrow range between 50 to 60 for 2007 and 2008 which was really an excellent performance considering what was happening in the market. After the Hospira (HSP) spin-off in 2004, the stock traded in a channel between 40 to 50 between 2004 to 2007, with brief breaks to 38 and change. The recent weakness may be due to a perceived weakness in sales of Humira, Abbott's most important drug and general weakness in the drug sector after Obama's victory. Another consideration may be a proposal made by Congressman Waxman for a five year period of exclusivity for biologic drugs. As I understand that proposal, this period does not impact the period of patent protection but is simply the time in which generic companies can not challenge the patent. The patent protection for Humira extends to May of 2018. As far as sales go, Humira rang up about 4.5 billion in 2008 and management has forecasted 25% growth in 2009. Institutional investors will make decisions on buying and selling this stock based on weekly IMS sales data which is just ludicrous but typical. Abbott received 9 regulatory approvals in 2008 including Triliopix which is a fibrate treatment that can be used with statins to control high cholesterol.

In February the company increased its dividend by 11%. - Yahoo! Finance
Barron's ran an article in February written by Neil Martin that claimed Abbott was the picture of health in a sickly industry. Barrons.com
The author pointed out that Abbott's stent sales rose 78% last year to 1.2 billion, and Humira sales rose 48% to 4.5 billion. A Morgan Stanley analyst was quoted in this article that earnings per share could exceed consensus estimates of $4.23 in 2010 and $4.72 in 2011. Those estimates were apparently from February. The estimate now for 2010 at Yahoo Finance is $4.21, still about ten times earnings for a quality company.

Citigroup upgraded ABT from sell to neutral on Thursday. A - CNBC.comAbbott's fourth quarter profit from 2008 rose 28% from a year ago. - Yahoo! Finance
Now, why would anyone have a sell on it? Excluding one time items, Abbott earned $1.06 per share up from 77 cents on a 10% rise in revenue. Abbott Reports Double-Digit Sales and Earnings Growth in Fourth Quarter; Confirms Strong Outlook for 2009 Earnings - Yahoo! Finance Abbott Laboratories Q4 2008 Earnings Call Transcript -- Seeking AlphaAbbott earned $3.32 in 2008 and backed forecasts of $3.65 to $3.7 in 2009.Forbes.com

Abbott also has a good nutritional business with sales up 12.2% in 2008 to 4.924 billion. The diagnostic business rose 13.2% in 2008 to 3.575 billion. Notwithstanding all of that, the stock will often trade off Humira news.

S & P rates Abbott 5 stars with a $65 target. A Morningstar report from March has it rated 5 stars with a consider to buy recommendation at below 54, raising it from around 50 in an earlier report. The Barclay's analyst has it rated overweight with a $65 target.

Progress Energy is a company that I already have some familiarity, and it has been discussed in prior posts. It is the result of a merger between Carolina Power & Light and Florida Progress a few years ago. S & P rates its 4 stars with a $42 price target. The payout ratio (dividends as a % of net profits) is high on this one so a dividend cut is not outside the realm of possibility. Nonetheless, when I start with close to a 7% dividend yield, any appreciation in the stock price would be an added benefit and a return to over 40 in a year from the current price would result in a 18+% total return. Barclays has it rated equal weight with a $39 target. VL has it 2/2 & Morningstar has it rated 3 stars. PGN is currently selling at around 11 times earnings, a P/S of 1.09 and a price to book of 1.09. PGN: Summary for PROGRESS ENERGY INC - Yahoo! Finance

Spectra Energy (SE), a holding in both taxable and retirement accounts, declared its regular dividend. Yahoo! Finance

This article explains Obama's double talk on his claim about reducing the budget deficit. - WSJ.com Obama proposes to add 4.829 trillion to a make no change baseline case prepared by the CBO. The graph on the first page of the CBO's analysis illustrates Obama's legerdemain. http://cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf We are going to wake up in less than a decade and wonder how the deficit has grown to over 20 trillion, listening to some politician or talking head from one of the two main tribes telling us they have a plan to reduce the budget in 2023 in half, like from 4 to 2 trillion-vote for me.

Politifact points out that Obama's claim about reducing the budget deficit in half by the end of his first term is at best misleading since he is claiming to cut the 2009 budget deficit in half which is extremely bloated at 1.8 trillion with a number of hopefully unusual and anomalous expenditures. PolitiFact |

DISCLAIMER:

I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments. Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed. These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities. All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.

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