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Drugs, Chips, and Other Quick Hits

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March 20, 2012 – Comments (1) | RELATED TICKERS: PFE , PEP , AIG

Let me begin by saying that I am very far from being a fan of Big Pharma. I think that as a whole our society is waaaaay over medicated. A lot of the conditions that people take medication for could be treated nearly as effectively through things that require more effort than just taking a pill, such as exercise, changing one's diet, meditation, and preventative medicine. I think that this over-medication is partially a result of the massive influence that Big Pharma has and even more a product of our broken healthcare system where many doctors are under-compensated by the current medical system, have becmoe jaded and would rather turn their offices into giant factories pushing pills and patients out the door rather than taking the time to work with them.

Whew, now that I have that off of my chest, I have to admit that many people do need and have been significantly helped by medication from time to time, myself included. It's not like I'm some sort of medicine man or Scientologist who shuns modern technology and won't let you take his picture. That's the main reason why the company that I am about to talk about passes my new found investing ethics test (barely) when companies like tobacco do not. There's at lease some people who benefit from pharma, while the same cannot exactly be said for tobacco...other than the people who sell it of course.

Anyhow, onto the company...one which I currently have a long position in - Pfizer (PFE). I bought a position in it a while ago in anticipation of it spinning off either its animal health or infant nutrition divisions. It looks like the former is going to happen and the latter will be sold off. Here's a link to an interesting article on the company:

Why Do Hedge Funds Love Pfizer?

http://www.insidermonkey.com/blog/2012/03/15/why-do-hedge-fu...

Despite the recent increase in share price, Pfizer’s valuation still remains among the lowest in the large cap pharma space (Bristol-Myers Squibb, Eli Lilly, Merck, Abbott, J&J) at 9.5x 2012E earnings versus a comparable universe mean of 12.6x.

With a promising pipeline of drugs targeting attractive markets, restructuring plans that will serve to unlock value, a rising dividend, and an undervalued stock price relative to its peers, Pfizer has solid post-patent cliff profile that will drive outperformance in 2012. Any positive data for its pipeline drugs should drive the stock price upwards. Strong fundamentals seem to have been identified by a number of insiders and fund managers as well including Ken Fisher and Bill Miller...


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Here's an interesting article on Pepsi (PEP). While the company does not appear to be a screaming buy at the moment, as Mario Gabelli said in a recent interview...if Pepsi executes and its stock goes higher, great, otherwise it can always split up into two companies - snacks and beverages - and see its stock outperform that way. I currently have a modest position in PEP.

PepsiCo - Hidden Potato Chip Dominance

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A while ago I wrote about a company that I personally owned and was fairly bullish on, Rose Rock Midstream (RRMS), a spin-off of SemGroup (SEMG).

One of Riose Rock's main assets is storage terminals for oil in Chshing, OK. I eventually sold RRMS for a small gain after reading an article about potential weakness in storage rates at Cushing (thank you Google Alerts) as a result of all of the capacity that's being built there.

That hasn't stopped RRMS' stock from running up to $25 from $20. I just came across an excellent article on the company for anyone who is interested:

Cushing terminal sees building boom as drilling hits record levels

Obviously the fact that drilling has hit a record level is very bullish for RRMS, but the "building boom" in storage tanks that the article references still concerns me.

This is one of those investments where I was truly torn about whether to sell. It is an under-the-radar spin-off that pays a solid dividend that many people may not be aware of yet. That's right in my wheelhouse. However, I am still concerned about the overcapacity issue. I usually say, when in doubt...sell. I continue to hold RRMS in CAPS to follow it.

Is anyone else out there following Rose Rock? I'd love to hear your thoughts.

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I know, I know. AIG is probably one of the most hated companies in the world and the U.S. government owns over a billion shares of the company. Having said that, AIG is making money...enough that it just bought back 100 million of its shares at half of its stated book value. Doing that repeatedly over time will really create value, unlike Apple's buybacks which are happening to offset dilution near its all-time high. I'm certainly not comparing AIG to Apple, just saying that if a company is going to buy back shares, this is how it should be done.

The stock has rallied quite a bit over the past several months and I expect that the massive government position in it places a cap on its share price in the short run, but a lot of very smart investors like this one.

Here's links to a couple of interesting articles on the company:

One of the Most Hated Stocks in America is a GREAT Deal

and

AIG and the $29 ceiling

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I have seen it argued numerous times in the past that the mini-BRK Loews Corporation (L) is way too cheap, but being the sucker that I am for sum-of-the-parts investment analysis I present to you yet another article on the subject. This piece is very detailed.

Loews Corporation: Cheap on Sum-of-the-Parts Basis

Thanks for reading.  Have a great day everyone!

Deej

1 Comments – Post Your Own

#1) On March 20, 2012 at 5:59 PM, Mega (99.95) wrote:

Have you dug into the numbers to understand how PFE will earn $2.30 per share in 2012?  Are those real earnings, or "earnings ex everything"?

It seems generous to assume that AIG's intrinsic value is close to book value.  Consider Buffett's experience with Gen Re and how many years he struggled to reform their accounting and turn them around.

Good article on Loews.  I agree it looks attractive, along with other conglomerates like Berkshire and Leucadia.

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