Looking for the Next Best Buy-it and Forget-it Stock
I’ve been doing rather well in my Roth IRA for the last year. I’m holding Provident Energy (PVX: chart, web, Y!), which turns a healthy 11% dividend and pays monthly, Duncan Energy Partners (DEP: chart, web, Y!), which recently increased its dividend by 2.5%, and my company stock, which has better than doubled over the last year.
Being in the oil industry, I think it’s safe to say that I’m overweight in oil and gas; which, at this point in time is not such a bad thing. However, down the road, I foresee a major pullback in crude prices, which will not be such a good thing for the industry.
So, I’ve set out to find the next great “buy-it and forget-it” stock.Naturally, I don’t literally mean forget it. I just don’t want to have to watch the stock price every day with a twitchy trigger finger on the sell button.
I want a stock that I’ll hold for 2 or 3 years at a minimum, pays a bit of a dividend, but has tremendous room for growth, not only as an individual company, but I’d like to see a good forecast for growth in the sector too.
Here are a few options I’m looking at, for various different reasons.
Southern Copper
Southern Copper (PCU: chart, web, Y!) has been on a tear for the last two years. Copper is in high demand, more so in China and India than in the U.S., but the effects of supply and demand are felt globally.
The stock is down from around $140 per share, and some analysts are starting to say that it’s a bit rich for their tastes, and a pull back is near. The company is subject to labor strikes in Peru and Mexico, and local banks have indicated that will negatively affect Q3 earnings.
AMLIMA (Dow Jones)–UBS said Friday that it had downgraded Southern Copper Corp. (PCU) to a neutral rating from a buy, citing a disappointing growth outlook.
The investment bank said it had revised its earnings estimate up by 3% in 2008 and up by 18% in 2009, by incorporating new copper price forecasts in its model.
It cut its 2007 earnings forecast by 8% due to strike-related production shortfalls and high costs. -Source
This latest action by UBS should be taken in stride, as the stock has been downgraded numerous times over the last year and it’s still going up.
It will be interesting to see what comes out of the Q3 earnings.
Schering Plough
Another option is to dive into the pharmaceuticals sector. Schering Plough (SGP: chart, web, Y!) just came out with Q3 earnings on Monday (transcript).
The company posted a profit of $750 million, or 45 cents a share, compared with $309 million, or 19 cents a share, for the same period last year.
This year’s quarter included a gain of $294 million, or 17 cents a share, related to acquisitions and a charge of $20 million for an upfront licensing payment.
Excluding certain items, SGP would have reported adjusted earnings of 28 cents a share. This missed Wall Streets expectations of 30 cents per share, which explains why the price took a dive on the news.
However, this is just the type of dive a guy might just jump in on. Profits are going up by leaps and bounds, yet the stock drops 13% because it missed the consensus for estimates by 2 cents per share?
I could see a future in the drug market!
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If I had to make one purchase for the next few years – a buy and forget – I would look at the Vanguard Total Stock Market ETF (Ticker:VTI). You don’t have to worry about being a good stock picker. You sit back and earn the market’s return all for a low cost of 7 bps per year.
Stock picking is a zero sum game for just about everyone. Sure, you will pick some winners, but you will also pick losers. And, after transaction costs (and taxes for taxable accounts), you will probably find you didn’t top the market.
Plus, by tracking the market, you free up time for the important things in life, rather than following the news and movements of individual positions.
VTI. I’ll check it out.
How about Walgreens (WAG)?
Hey Mike, I’ve been thinking about the basic consumer goods market lately, as those products will always be in demand despite what the economy does.
I’d though of JNJ, P&G, etc… but I hadn’t thought of the local retail aspect of that sector (like Walgreens).
What do you like in WAG? The 3-year chart has been fairly volatile, but it appears that the stock is at the low end of the trading range, emboldened by downgrades from investment houses after WAG reported their first earnings decline in a decade…
Hi Grant..
Being a pharmacist and individual investor, I worked for almost all of the chain pharmacies and researched their financials/business models on my own.
Walgreens, by far, leads the pack in every aspect. IMO, as consolidation continues in this sector, Walgreens will continue as “the” top drug retailer, with only one or two competitors being left over time.
Some may argue that CVS, now being merged with American Drugs Stores, Eckerd and Caremark, is a better investment than Walgreens, but IMO, they are not even “close” to being as well-managed or electronically and politically sophisticated as WAG.
Some may also argue that Wal-Mart is a better play, but Wal-Mart pharmacies aren’t open 24 hours and they don’t have stores conveniently located on just about every corner. Wal-Mart also has a hard time recruiting and retaining pharmacists.
Rite-Aid? Fuggetaboutit!
WAG (along with all other drug chains) has been negatively-impacted with the recent Medicare Part-D reimbursement rates, hence the lower earnings. I wouldn’t view their earnings shortfall as a company problem, but an industry problem. It will affect everyone.
You probably know that I’m awaiting a predicted recession, so WAG may fall to even lower levels if that happens. But if you disagree with my prediction, now would be a good time to buy WAG since it dropped in price because of it’s unusual earnings miss.
I agree, Mike. I think Walgreens has better footing in the retail pharma sector than just about anyone else. Eckerd is not even on the map, and I’d never even heard about Caremark until the CVS deal.
I completely agree that we’re due for a recession, and there is still a lot of denial in the market that this is right around the corner.
How much of an advantage do you think the 24/7 operation has over the Wal-Marts who aren’t open around the clock? I agree, there is a competitive advantage, so long as the increase in overhead is offset by after traditional hours sales.
I’ve liked the pharma industry for a long time, but haven’t taken the leap forward yet. Still considering SGP, but am still doing research on them.
-Grant
CVS essentially bought out Eckerd and American Drug Stores (Osco) through a series of mergers between a few different chains (its convoluted). The big three “pure” retail pharma players would be Walgreens, CVS/Caremark and Rite-Aid. There are some regional chains left, but they’re getting swallowed-up over time.
I think Walgreen’s 24/7 operation offers a big advantage.
Walgreens doesn’t consider Wal-Mart a major competitor. They’re more concerned with CVS/Caremark. I guess WMT could be considered a major retailer, or food & drug store, offering pharmacy as a portion of their “other” business (e.g. Kroger, Safeway, Publix, Target, etc.).
Wal-Mart could take some business away from Walgreens because of their newly introduced loss-leader pricing (Target & Publix too). However, for those with multiple medications and chronic conditions, and for those who travel, Walgreens offers much better services. Walgreens can “easily” transfer prescriptions throughout the country through their state-of-the-art computer systems, at stores conveniently located “everywhere” and accessible at “anytime”, and with convenient drive-thru services.
Judged by their prescription counts, the public sees this as an advantage too.
When an emergency happens, at any time of the day, there’s always a Walgreens store close by where you can consult with your pharmacist for free and buy any needed emergency Rx or OTC products. I guess if Wal-Mart decides to offer such conveniences, then maybe Walgreens will start to worry.
Also, like CVS/Caremark, Walgreens offers a discount mail-order service, home health, and DME services. However, CVS/Caremark now has a bigger presence. However, I’ll bet Walgreens probably has some type of hidden M&A activity in the works in this area (Humana?, Express Scripts?).
Walgreens is also a drug store chain managed and operated by pharmacists. Can’t say that about Wal-Mart, Target, the food & drug stores, and even Rite-Aid (CEO isn’t a pharmacist). This is important to many pharmacists and makes a big difference in recruitment and retention.
Just my take on it..
Disclosure: I don’t currently work for Walgreens or any of the companies mentioned.
BTW, I think SGP would be a good investment too.
Thanks for the feedback, Mike. If you had to buy one, which would it be? SGP or WAG?
Right now I think SGP is the “safer” bet. International exposure, and they cover the pharma market a level higher than WAG does.
Both would be good long-term investments, but based on current prices, WAG would be my choice.
Personally I tend to look at a stock when it’s fallen from favor. WAG is trading at new lows, while SGP is trading a new highs.
Stories like this help describe what I mean about pharmacists attitudes towards working for a company not fully owned, operated, or managed by pharmacists. Such treatment only serves to make recruitment and retention of pharmacists extremely difficult.