I was just sharing some thoughts with someone recently on pharmaceuticals. Was it you? Pfizer, if I recollect correctly? Anywho, this Value Line editor apparently is long-term bullish on the drug companies...
valueline.com
The Value Line Mutual Fund Survey
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Published June 6, 2006
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Drugs, Another Update
Over the past year or so, I've mentioned that I believe large drug companies are a good long-term investment. I still believe that, even if a turnaround still isn't in sight.
I've even initiated positions in three drug stocks that I'll build up over the rest of this year or so. My choices, driven by my penchant for dividends, were Pfizer, Merck, and Bristol-Myers Squibb. The prices of each were higher when I bought them then when I first commented on the segment over a year ago, much to my chagrin. In addition to these three stocks, GlaxoSmithKline and Eli Lilly are others worth looking at.
For fund investors, the purest options are exchange traded funds (ETFs) HOLDERS Pharmaceutical (PPH) and PowerShares Dynamic Pharmaceuticals (PJP), and actively manged mutual fund Fidelity Select Pharmaceuticals Fund. Of the three, the Fidelity fund is the only one to post a respectable year-to-date gain through April, advancing about 8%. The other two were, essentially, breakeven or so over that span. My more broad-based fund recommendations, Vanguard Health Care Fund and T. Rowe Price Health Sciences Fund, were both about breakeven or down slightly, too.
Although these results don't shout out resounding success over the short term, this recommendation isn't intended for short-term results. I'm suggesting adding a beaten-down industry to the core of your portfolio. Moreover, I wouldn't allocate a huge amount of your portfolio to this segment, but up to 5% of assets, well diversified within the industry, wouldn't be outlandish.
The point is that, despite the negatives that are hurting pharmaceutical stocks, there are a lot of positives that aren't getting as much attention.
We've all read about the ongoing legal woes, patent expirations, and thin new product pipelines that are crimping drug companies' results. These are real issues that will have to be dealt with. My belief is that the industry will cope with the present problems and move forward. How this will be done I'm not sure, but it's likely to include restructurings, layoffs, and mergers. It might even get uglier before it gets better.
Still, Value Line's Drug Industry specialist George Rho notes that demographic and socioeconomic trends in the world today, such as increasing longevity and rising living standards, should be long-term positives for the pharmaceutical industry. Rho also points out that history suggests that there is a cyclical nature to important drug discoveries. Put these factors together with the currently low prices commanded by some of the biggest and historically most successful companies in the industry and, in my eyes, it spells a long-term buying opportunity.
Still, recent results aren't anything to write home about, and near-term performance isn't likely to be too impressive. Indeed, Value Line gives the industry only a middling rank for year-ahead performance. Healthy cash flow, however, should provide most in the industry ample time to improve company-specific prospects.
What will I do now? Well, I've put my money where my mouth is, and I've purchased three companies that pay relatively substantial dividends. My plan, essentially, is to dollar cost average over two more purchases. I'll be done after that.
This isn't a stock newsletter, so funds are more likely your chosen investment vehicle. So, if you own any of the funds I've mentioned, don't do anything—you already have exposure here. Let that ride, assuming it's under 5% of your total portfolio. Anything more and you might consider trimming your position a little.
If you don't have any exposure, Fidelity's select offering has proven to be a solid option, with the two exchange-traded funds as index-oriented back ups. If you prefer a less specific approach, T. Rowe Price Health Sciences Fund is a good choice, as Vanguard Health Care Fund is currently closed to new investors.
Reuben Gregg Brewer
Editor
EK!!! |
