Monday, June 28, 2010

Barron's on BIG Pharma Stocks: NVS SNY BMY Roche PPH /St Joe/

While others may disagree, I believe that the fiscal restraint shown by the European leaders at the G-20 conference is positive for the markets. NYT I also suspect that it will provide some support to the Euro. The recent rapid decline of the Euro was caused by EU members unable to control spending as their budget deficits soared as a percentage of their GDP.

1. Barrons Favorable Article on Big Pharma {own Novartis (NVS), JNJ, Roche, Sanofi (SNY), Bristol Myers (BMY) and the ETF PPH): At the start of this year, I did not have a position in any of the Big Pharma stocks. I only started to add positions over the past couple of months based on what I believed to be favorable valuations. The bearish case is well known and revolves around the expiration of patents on a number of key drugs. The easier targets for blockbuster drugs, such as cholesterol and high blood pressure, have already been addressed for the mass market. Blockbuster drugs for those conditions have already lost their patent protection (Norvasc, Zocor, Pravachol) or soon will (Lipitor, Diovan). Over the last decade, moreover, several of the drug companies have spent billions with little to show for their efforts so far in approved blockbuster drugs. Pfizer would be at the top of my list in that category. All of those factors have led to many of the Big Pharma stocks to sell at low multiples with several sporting dividends in the 4% to 6% range. There also seems to be little or no focus on the good news.

One of my recent purchases was Roche. The article in Barron's highlights Roche's cancer franchise, its current P/E of 11 and the possibility that the stock could appreciate by over 30% "in coming years" by applying that same multiple to earnings growth. I bought 100 shares earlier this month: Added 70 RHHBY at 34.07-Completing Round Lot

Novartis is also mentioned. As the author notes, NVS has a 4% dividend yield at the current price, and is selling at less than 10 times earnings even though it "has one of the better growth outlooks in the group". I bought some shares last week. Bought 100 NVS at 49.08 One negative mentioned by Barrons was the multiple offered by Novartis for the Alcon shares that it does not already own. The Barron's article argues that the European companies "look better" than the U.S. drug companies, due to their greater presence in emerging markets.

For both of these Swiss companies, my prior discussions delved into the impact of the recent decline in the Swiss Franc on their respective ADR prices compared to the ordinary share price on the Swiss stock exchange.

I also bought the ETF PPH which seemed like a good idea at the time. This ETF has a fixed allocation to shares of several U.S. pharmaceutical stocks. I was early on this purchase, buying 100 PPH at 65.42 in mid April. Each 100 shares of PPH contain the following:

Abbott Laboratories 14 shares
Bristol Myers 18 shares
JNJ 26 shares
Lilly 10 shares
Merck 30.07 shares
Pfizer 69.82 shares

There are smaller positions in Allergan, Biovail, Forest Laboratories, Hospira, King Pharmaceuticals, Medco, Mylan, Watson, Zimmer and Valeant Pharmaceuticals. Pharmaceutical I would add that the other ETFs mentioned in the Barron's article (e.g. Vanguard Health Care ETF) do not focus on Big Pharma names and contain a mixture of healthcare stocks.

I have been considering the purchase of a small number of LLY shares, but have not made a decision. I was tempted last week when the price fell below $34. I am more likely to add 50 shares to my position in Sanofi (SNY) before initiating one in Lilly. Bought 50 SNY at 34.21 Those SNY shares were bought before the recent ex dividend date (5/17). Sanofi-Aventis SA, SNY Stock Quote SNY is selling for about a 8 P/E based on estimated 2010 earnings and has the largest presence in emerging markets at 30% of its revenues, as noted in the Barron's article. A significant part of the decline in SNY since November 2009 is attributable to the EUROs decline against the USD (see discussion at Item # 1 Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas)

2. St. Joe (JOE)(own): I bought shares of St. Joe at $15.69 in March 2009. I was thinking about selling those shares after they crossed above 30 but decided to stay with the shares. St Joe has historically been valued as an asset play, and its asset is around 405,000 acres of land within 15 miles of the Gulf Coast along the Florida panhandle. Almost 75,000 acres are in proximity to Panama City where a new international airport just opened. Item # 1 St. Joe There is a debate occurring now about the impact of the gulf oil spill on the value of those land holdings.

The market's verdict so far is the oil spill has impaired the value of St Joe's land. But, it is not clear how much of the fall from $37.13 on 4/29 to $22.87 as of Friday's close is due to the oil spill or the market's correction and heightened concerns about a double dip. The Deepwater Horizon exploded on 4/20/2010 and the magnitude of the spill was becoming apparent by the end of that month: Timeline The S & P 500 hit its high in the cyclical bull move starting on March 9, 2010 on April 23rd at 1217.28. The close last Friday was at 1076.76, a decline of 11.45%. JOE's decline from April 23rd is about 35.55% or about 24% more than the market.

While it is far from certain, it is difficult to see how the oil spill will have a long term impact on land values along Florida's panhandle. So, I would be in the camp that St. Joe's long term appeal has not been diminished by the oil spill. But it is clear that many market participants are not going to wait for that final verdict to arrive, and their reaction so far is to sell the stock. I did not anticipate the severity of this stampede.

Cramer put St Joe on his sell block last week with a "sell, sell, sell" recommendation even though the stock has lost almost 38% of its value from the recent high of $37.13 on 4/29. Dan Fitzpatrick, the technician a TheStreet agrees with Cramer. If I was inclined to take their recommendation on St Joe, I would go ahead and take my long term capital gain on the shares bought at $15.69. Instead, I am considering adding to my position with the caveat that any purchase now will have to be held for years. I will track just how prescient the sell recommendations from Cramer and Fitzpatrick turn out to be. The sell recommendation was made on Thursday, June 24 with the share price at $22.47: JOE: Historical Prices for St. Joe Company

I would agree with Cramer that it will be difficult for this stock to mount any sustainable rally given the short term thinking that dominates the market's approach to valuation which he shares in spades. I would also agree that a potential recovery of damages from BP is insufficient to stop the current bleeding, though it may help the stock to recover once the full extent of the damage is known. I would add that the spill is likely to delay the recovery of the panhandle's real estate market which suffered a substantial decline during the Near Depression period.

A more upbeat assessment can be found in this article in Barrons written by Bob O'Brien.

I am no hurry to add to my current position. I suspect that the stock is pretty much washed out based on what is known now. If BP's relief wells work, and most experts apparently believe they will, then I may be in a better position to assess the damage then based on news reports of how much oil is washing up on the shoreline. If the relief wells fail, then I would not add to the position.

For those who routinely engage in hyperbole about events or gyrations in the market, it is not surprising that they would elevate the oil spill to a far greater impact on property values than the ever present hurricanes which have caused widespread damage over the years along Florida's coastline.

A mutual fund with a large stake in St Joe is the Fairhome, whose lead manager is Bruce Berkowitz (FAIRX - Fund Top 25 holdings). Berkowitz recommended St Joe in a March interview in Barrons. Another major holder is the Janus Contrarian fund: JOE: Major Holders for St. Joe Company (The) Common This data may be stale.

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