Monday, April 25, 2005

Martha Stewart and the Flu shots

In his biography of Warren Buffet, "The Makings of an American Capitalist" the
author Roger Lowenstein, makes a point that most of the time the
market is efficient and fairly valued. However on occasions there is
such disdain for the stock market and there is blood in the street.
These are the occasions when the true value players like Buffet make
their killing.

I think the same holds true for individual companies. I can point to
some recent examples where I did do something and occasions where I
wish I did do something, case in point Martha Stewart Living Omnimedia
Inc. (NYSE:MSO), In July of last year when it looked certain that
Martha was going away on her rehabilitation, the stock dropped to
$8.50, Today as Martha is making a comeback its up nicely to $20. The
question I should have been asking myself then was; would I stop
buying home decoration and other stuff marketed by MSO because the CEO
and founder of the company was in jail for a year (not sure of the
jail term). The answer of course is NO but I was swayed by the
naysayers who claimed that Martha was the face and life of MSO and
that this would do irreparable damage to the brand and blah blah blah.
Anyway case in point, I screwed up a marvelous opportunity to own a
household brand, a part of the America dream at a rock bottom price.

I did scoop up quite a bit of Pfizer (NYSE:PFE) after the
Vioxx/Celebrex debacle, I had elaborated my reasons in one of my
previous blogs about why PFE is a great company and buying it at $24
was a great idea, The stock is up to the $26-27 range and still a
great buy. I think in two years this will turn out to have been a
great time to have bought this awesome company at these low prices.

Exhibit III is another drug/healthcare company Chiron Corporation
(Nasdaq:CHIR). These folks had their asses kicked in Fall of 2004 when
the British regulator forced a shutdown of their flu vaccination plant
in the UK due to compliance issues. This resulted in a major shortage
of flu shots in the US and all the rationing that followed. The stock
of course dropped down to $30 from $46 in a day or so. Fact remains
that Chiron is the largest maker of these flu shots. It is not so easy
or cheap for a competitor to come in and swoop their market (nothing
to mention of the compliance and drug approvals that the competitor
has to go through). The stock is up to $36 after about six months
although some competitors (Sanofi-Aventis) have gotten permits for flu
vaccines, Chiron still is the biggest player in the market and who can
say no to a 20% gain in six months.

Anyway we should let bygones be bygones and look to the future – I spy
two companies in such situations today the embattled insurance giant
AIG (NYSE:AIG) and the data services provider Choicepoint Systems
(NYSE:CPS) that are in trouble and the market hates them but the
underlying economic and competitive advantages these companies enjoy
will help them ride out these troubles.

AIG is the world's largest insurance company; eventually they will
settle with the SEC and the NY state, pay some humongous fines and go
back to business. That is how these things work (look at all the
mutual fund scandals, the analyst scandals etc). Elliot Spitzer and
other wannabee Governors get their name in the paper, the companies
settle pay the fine and go back to work. Meanwhile today the stock is
down from $72 to $52.

CPS has all your life's financial data - credit cards, car loans,
student loans, phone bills and even those unpaid book or CD club
bills, anything that you ever did with money. In today's information
driven world this is an economic moat that is hard to replicate. They
have been plagued by the identity theft scandal (they dropped from $46
to $36 in a week and are up to $40 now). CPS says they are cooperating
with the authorities, in the long run I think they are a winner.

I am following these two closely especially AIG to see how the cards
fall and then scoop some shares.

Anyway the point was great companies with great businesses do get into
trouble with the law, with crooks etc and usually these are occasions
when you can get great businesses at cheap prices; so keep your eyes
and ears open.