Developments at Dow component Hewlett-Packard (HPQ) read like something out of a spy-thriller: newsroom spying, anonymous leaks, Congressional investigations, and management reshuffling. Given the seriousness of the charges, not to mention to heavy media coverage, you might be surprised to learn the stock has nevertheless risen strongly in the weeks since the story first broke.
In my experience, investors should avoid following the headlines, and instead focus on what matters: price action. Once you begin making assumptions about how an external news event might affect a market, you implicitly accept a cause-effect relationship that just doesn't always hold up — just as we've seen in the case of Hewlett. The news is bad but the stock is strong. Shortly put, that's where I'd take my bullish cue.
Question: Does the value of a stock in a drug company with a very popular medication lessen when that pill is available in generic form? — Joe (Sacramento)
Considering it costs north of $800 million to develop and test a new drug, patents mean everything to a pharmaceutical company. When a drug company's patent expires, it allows other firms to capitalize on their innovation and discovery, usually offering an identical product at a lower cost. The generic manufacturer avoids the research, regulatory and marketing costs already paid for by the drug's original creator.
Mylan Laboratories Inc. (MYL), Barr Pharmaceuticals Inc. (BRL) and Watson Pharmaceuticals Inc. (WPI) are a few examples of the large generic drug makers. Interestingly, however, in recent weeks the traditional large-cap pharmaceutical companies such as Merck (MRK), Pfizer (PFE) and Novartis (NVS) have become legitimate market leaders. Although my hedge fund holds no positions in these names, that's where I'd likely look right now if you were interested in allocating money to the sector.
Question: I love shopping at Whole Foods (WFMI), even though it is so expensive. Do you expect Whole Foods stock to go up, or is this just a flash-in-the-pan consumer trend? — Chris (Missoula, MT)
Whole Foods Market is a gorgeous triumph of progress, productivity, achievement, and ingenuity. The wide variety and ultra-high quality of the chain's products are an inspiration even to us non-chefs. I personally consider their salad bar to be among my favorite dinner options, and for a cheese and olive lover like me, the store is just about heaven on Earth.
But one must never forget that a company and its stock are two different entities altogether. It's okay to love a company, but not buy its stock. There are plenty of companies, Xerox for example, that persevered or even prospered as their stocks withered.
When you buy a stock, you're buying a valuation. Even if a modest dividend is paid, you're essentially betting on the greater fool theory, hoping that at some point someone else will come along and buy the shares at a higher price. Because stocks tend to anticipate news rather than reflect it, shares are often at their hottest long before the good news breaks. So while we'd like to think that a successful enterprise equates to an ascending stock price, history often suggests otherwise.
As wonderful of a store as Whole Foods is, I don't see now as being an exceptionally good time to step into the stock. With a P/E of 50, it is hard to call the shares cheap, and the stock is still weak at $60 having fallen from near-$80 level reached last January. Although I love their chunky almond butter as much as the next guy, I'd want to see the stock touch at least $70 before putting this one in my shopping cart.
Question: The Drug Store Wars: Now that national drugstore chains are selling much more than drugs, should I buy stock in Rite Aid (RAD) or CVS Corporation (CVS)? — Alexa (Narragansett, RI)
CVS (CVS) and Rite Aid (RAD) have become the modern-day general store, where one can pick up aspirin, film, groceries, greeting cards and even gifts. Anybody who laments the disappearing small mom-and-pop pharmacy needs to get their head examined. These stores boast long hours, a wide assortment of products, competitive prices and sophisticated online ordering systems.
A rising tide tends to lift all boats, and right now virtually all the major drugstores are enjoying a strong bull run. Both Rite Aid (RAD) and CVS (CVS) appear strong, as does my hometown favorite, Walgreen's (WAG). Assuming you don't already have exposure in the sector, I'd consider a 2-5% position (along with 15% stop loss) in any of these names a timely and high-quality trade.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC and is a markets columnist for Smartmoney.com. He appears regularly on FNC's business program Cashin' In. At the time of writing, Hoenig's fund held no positions in any of the securities mentioned.