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January, 2004

NEGLECTED OPPORTUNITIES
THE NEW MEDICARE LAW
by LARRY

Though stocks overall are rather overpriced lately, within this broad-brush circumstance there remain equity areas that are overlooked and undervalued. Two of these are our focus this time.

The first, health care companies, have been relatively depressed for awhile due to concerns over profitability, as individuals, employers, insurance companies, and governments react to ongoing double-digit increases in costs for medical treatment and prescription drugs.

Yet this overall sector includes quite well managed corporations that have superb financial strength and average returns on shareholder equity of 15% or better.

Meanwhile, our population (and electorate) is aging. One way or another, the politicians and the people they purport to serve must come to terms with the financial realities in a way that remains lucrative for the companies which will provide our essential health related services. As it has always been, the strongest publicly owned health care companies, whether name brand pharmaceutical businesses, biotechnology enterprises, hospitals, medical technology companies, generics, etc., will not only prevail but make plenty of money for their shareholders.

Pfizer (PFE) (recent price $35.00), Omnicare (OCR) (recent price $43.82), and Quest Diagnostics (DGX) (recent price $76.81) look attractive at this time.



Other alternatives, for those who prefer investing in the health care sector without picking individual stocks, include:

  1. Mutual funds, such as the excellently managed Vanguard Health Care Inv. Fund (VGHCX) (recent price $122.17)

  2. Exchange traded pharmaceutical funds, such as Merrill Lynch's Pharmaceutical HOLDRs Trust (PPH) (recent price $79.90)

  3. Broader exchange traded funds, such as the Dow Jones U.S. Healthcare Sector iShares (IYH) (recent price $58.04).

I like to keep about 10% of our equities in health care assets, particularly pharmaceuticals, and view this as an effective hedge against the ever increasing expenses of health care insurance and treatment.

Short-term concerns have held the health care segment of the U.S. economy and its stocks down lately, particularly so for the pharmaceutical industry, but, for those willing to wait, it now has quite good long-term potential.



Another area of the stock market that has been neglected is surprising given the last tax-cut law. That legislation cut shareholders' taxes on most stock dividends from the ordinary income rate to 15%. Yet good companies with above average dividends are still available at reasonable prices. Here are several that currently appear attractive:

CompanySymbolPriceDividendPayout
Ratio
A.J. GallagherAJG$32.072.25%46%
Charter One FinancialCF$34.323.07%34%
Exxon MobilXOM$40.502.46%36%
First Midwest BancorpFMBI$32.322.72%39%
Hibernia Corp., Class AHIB$23.533.11%37%

Investing in neglected or contrarian equity opportunities may or may not knock your socks off with superlative performance, but it tends to only modestly lag the averages in bull market years, while providing better than the norm performance in bear markets. This combination of "I think I can, I think I can" Little Engine That Could steadfastness while others are losing their heads, in periods of "irrational exuberance," and downside protection, in times of extreme worry, leads, over the long-term, to relatively better total returns, yet with lower risk, than are available from investments in the currently most popular stocks. Try it. You'll like it!



The New Medicare Law

While we're discussing health care and pharmaceuticals, the recently passed and signed Medicare legislation has proven confusing or even distressing to some seniors. At first glance, it seems less than ideal but is likely to be advantageous for many, though not all, Social Security beneficiaries. Those already on employer, retirement, or other insurance plans that cover drug costs may not see a benefit. Seniors will need to decide whether or not to pay for and use the law's drug provisions.

At least from an investor's standpoint, those statutes have the advantage of significantly increasing the capacity of the average older patient to purchase needed prescription medications and so of elevating the potential earnings of branded pharmaceutical and generic drug companies.



DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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