Stock Values

I am happy to report that after an almost six month hiatus, I have cherry picked a worthy stock to buy and that stock is... (drum roll, please...) Abbott Laboratories (ABT). My last stock buy was a late January of this year purchase of Pfizer, Inc. (PFE) I will begin with a few words about why I continue to like big pharma (I am also holding a position to Johnson & Johnson (JNJ) - acquired late March 2007) and then go more specifically into Abbott Labs.

Health care reform is on everybody's mind and "everyone" knows that means lower profits for drug makers,... or may be not. It is no secret that our dear leader, a friend of the common worker, whose presidential campaign was paid for by unions, has been repaying his socialist backers ever since the election. Last July he let Fannie Mae (FNM) and Freddie Mac (FRE) be taken over by the Federal Government, then his government forced Chrysler and GM to give away disproportionately large chunks of their companies to United Auto Workers and now he is attempting to pull a quick one with a health care plan that boggles any capitalist mind.

However, this week came a break. Earlier in the week several polls showed Obama's approval rating dropping precipitously (some to below 50%). Rightly, the new disapproval was in large part attributed to his handling of the heath care reform. Americans want good, affordable health care, but they have waited for it for a long, long time. To push such fundamental reform through and make it law in a matter of a couple of months is not unnecessary, it is also unreasonable and even dangerous. Every nuance of this excruciatingly detailed and large document will have its own intended and unintended consequences. Time is required to let people make an educated choice. (We are, after all, a "government of the people, by the people, for the people.") Yes, that's right, Americans don't want to give up their freedom of choice - it's fundamental.

On Thursday, also came the news that the Senate pushed back and will not vote on the health reform before their August recess. I read this as a confirmation that Congress will take its time and duly consider important issues related to:
1) The creation of a new public health insurance company. (Can we, perhaps, more efficiently publicly fund privately administered insurance?)
2) Paying for the insurance. (Isn't taxing only the "rich" to provide benefits only to the "poor" a form of Socialism?)
3) Reimbursement schedule. (If US government mandates a maximum reimbursement schedule that only covers marginal costs, who will invest mega $ into the fixed costs - medical schools and education, medical equipment and wonder drug R&D?)
4) Freedom of choice. (Will we retain our right to choose a different insurer, doctor, facility and even to pay more for better or different medical services?)
5) Coverage. (Who will be able to get services and what services will be available under the new program? If your mental relatives want to keep the brain dead you on life support for the next 50 years, should the tax payers pay for it? Who will decide?)

These are just some of the issues, related to health care reform, law makers are facing. I am confident that without unreasonable time pressure (i.e. Mr. President breathing down their neck), congressman will settle on a solution that will preserve capitalism. This is especially important for pharmaceutical companies, because a mandated reimbursement schedule that ignores R&D costs, will make certain that no new blockbuster drugs get developed and will destroy big pharma within a decade. Given the push back and the president's plunging approval ratings, I am now, once again, reasonably comfortable betting that Congress will not let that happen. (And if it does, we will have much bigger problems on our hands, anyway.)

So, why did I choose to purchase shares in ABT? I had two main reasons:
1. Abbott Laboratories management is really top notch. This is demonstrated by the smart deals they continually make. For example, in April 2006 to help Boston Scientific (BSX) appease the regulators, Abbott acquired Xience from Guidant Corp., when Boston Scientific bought Guidant. As part of the deal, Boston Scientific has to market the superior Xience stent (alongside its Taxus stent) and return 40 percent of those gross profits to Abbott. In another super smart move announced just today, Abbott acquired 9.6% of NeoGenomics, Inc. (NGNM) stock for $4.8 million. Nice investment and what makes it really interesting is a separate agreement under which Abbott will supply materials for NeoGenomics to develop and commercialize a FISH (fluorescence in situ hybridization)-based test for melanoma diagnosis in the United States. Once the probes have been identified by NeoGenomics, Abbott will supply them (some on an exclusive basis) over the course of a ten-year term.

2. Abbott Laboratories is trading at a very attractive price. At about 6% over the 52 week low and 42% above the 10 year low, it is currently trading at a realistic P/E of under 13 - below its historic and industry P/Es. In today's low interest rate environment, it still pays a very stable and attractive dividend of about 3.6%. For a drug company that is very strong (S&P AA credit rating), price stable (Beta of 0.22), has one of the strongest drug pipelines in the industry and continues to grow (S&P 3 year projected EPS CAGR of 11%), this is a steal. Even under the worst case circumstances, in the environment where Congress doesn't exercise their infinite wisdom, unreasonably limits drug prices and kills off all drug research, this company will produce discounted cash flow over the next decade to warrant the current price.

Since the March market lows, pharmaceutical companies mostly stagnated (on Friday, JNJ and PFE closed at prices barely above what I paid for them), but the rest of the markets (and especially financials) zoomed way ahead. One of the stocks that remained in a portfolio that I "inherited" from a money manager was a financial - ING Group NV ADS (ING). Along with other financials it was, perhaps, unfairly punished and traded at a low of $3.02 in March of this year. It has since rebounded by a factor of almost four, yet is still trading at about a quarter of its 2007 high. At current levels, I judged it to be trading above fair value and sold it.

On Thursday, July 23, 2009 I bought ABT shares @ $43.96 / share and sold the small ING position @ $11.86 /share.