Recap of Sat., Sept. 20:Aventis and Annaly Mortgage

Our panelists give you the scoop on all the inside business information before you hear it anywhere else in The Informer segment:

David Asman: Dennis, drugs of the future.  What do you have for us?

Dennis Kneale, managing editor: The “Forbes 400 Rich List” is out this week.  A billionaire in the magazine controls a company called American Pharmaceutical Partners (APPX).  This week, maybe, or next week, new drug trial results come up that could make this stock pop.  Most cancer drugs, before they get to the target, they lose half their power.  The body breaks them down.  This company has created a human protein envelope to tuck the cancer (search) drug inside it.  By the time it gets to its target it’s twice as effective as it used to be, and this same envelope, you might be able to use it for other drugs. 

David Asman: But will it lead to profits?

Dennis Kneale: The stock is expensive.  Buy it and hold it for 2-3 years, and maybe you’re going to make some money.

Mike Ozanian, senior editor: Absolutely.  Great company, great drugs, the stock’s tripled this year, it’s at about $40, I think.  I might wait for it to pull back a little bit until I bought some.

David Asman: Victoria, let’s go to you.  Mergers: we heard about this Peoplesoft (PSFT) merger, with JD Edwards (JDEC), how’s it working out?

Victoria Murphy, senior reporter: It’s working out pretty well from what I hear, and the integration is not as complex as one might think.  But I think investors, hi-tech investors, have been a little distracted lately, by Larry Ellison’s [chairman and CEO of Oracle (ORCL)] bid to take over Peoplesoft.  I think this provides a buying opportunity for Peoplesoft.  Let’s think about Craig Conway’s (president and CEO of Peoplesoft) ego for a second.  He really wants to stick it to Larry Ellison.  He used to work for Larry; Larry’s trying to take over his company.  The best way to stick it to Larry is to have a great quarter, bump the stock up, and then it becomes too pricey for Larry. 

David Asman: OK, so the grudge match will lead to better stock price.  What do you think, Dennis?

Dennis Kneale: Victoria has a nice idea, but I might rather buy Oracle, because if they win Peoplesoft, the stock’s stronger, and if they don’t get it, the stock goes back up.   

David Asman:  OK.  Mike, we were just talking about rich people, you can’t always get into these big funds that they’re in, but you know what some of those funds have.  What are they?

Mike Ozanian: Sequoia fund (SEQUX), great fund, one of the best performers of all time, buying shares recently of Mohawk Industries (MHK), which makes floor coverings and carpeting.

David Asman: Sequoia fund is one of these rich people’s funds, and one of the things in it is Mohawk.

Mike Ozanian: Accumulating a lot of Mohawk recently, very profitable company, very little debt, cheap stock, buy it.

Dennis Kneale: You know, the only thing I know about floor coverings is what I walk on, but I would trust Mike Ozanian.

Makers & Breakers

Aventis (AVE)

Mike Norman, president of the Economic Contrarian Update: MAKER

I like the pharmaceuticals sector.  It’s a little bit defensive, this stock, this company has some very good drugs, Allegra being one of them.  They have a partnership going on with Merck (MRK) right now.  The stock is cheap on a relative basis, and I just like the sector.  I think it’s going to do very well.

David Asman: Jim, could you ever like a stock that’s based in France?

Jim Michaels, editorial vice president: MAKER

I drink French wine; I eat French food, yeah.  I think it’s a good company, I think it’s reasonably priced.  I’m a maker on it, I would just add that there is currency risk in this stock.  If the euro drops against the dollar, you could take a little bit of a hose on it.

Elizabeth MacDonald, senior editor: MAKER

I’m for it too.  I’m a maker.  This stock has seen its profits grow, on average, 160 percent over the last three years.  It’s cheap at $55, trading at around 17 times earnings, great 50/50 joint venture with Merck, and animal health businesses.

David Asman: All right, everyone’s for it, but does it bother you at all that it’s a French company?

Mike Norman: Yes, it does.  But, you know it’s been a long time since Jim Michaels picked on me, so I thought I’d give him an easy one.

Annaly Mortgage (NLY)

Mike Norman: MAKER

I like this because, basically, this is a bond market play.  I mean the way Annaly’s business is structured is that they invest in mortgage-backed securities, so they make their profit on the difference between their cost of capital and what they’re making from the mortgage backs.  I think that’s going to go in their favor.  If we get into another one of these cycles of down interest rates, which I think we’re going to have, you’re going to see that stock do very, very well.

Elizabeth MacDonald: MAKER

I’m a maker on this stock too.  I don’t like this stock because it’s a “chick stock,” because half of its officers are women, not wanting to seem to be focused on feminist issues, but because the stock has a terrific cash flow, mortgage-backed securities typically triple-A.  It’s a smart stock.

Jim Michaels: BREAKER

I’m sitting this one out, sorry.  My objection to it is that it’s a REIT.  The dividend, although it’s very substantial, is not tax advantaged.  Secondly, it’s leveraged 10-1.  It’s playing the yield curve, and that scares me. 

David Asman: Mike, what happens if interest rates go up? What happens to this stock then?

Mike Norman: If interest rates go up, then you’re going to see a narrowing of their profit margin; it’s not going to do as well.  They did cut the dividend recently, and the stock was downgraded, which is another reason why I like it, because I like to invest in a contrarian fashion.  By the way, it’s still a very attractive dividend yield, about 6.5 percent.  That, alone, I think, makes it interesting.

David Asman: I’ve got to ask you, Jim, if interest rates did come down, even further than they have already come, would you like this stock then?

Jim Michaels: Yeah, but I don’t think that interest rates are going to come down.