Although Merck (NYSE: MRK) does not officially announce their 1Q 2007 results until April 19, they let the cat out of a bag a little bit today at around 6:30pm. In short, MRK expects better than expected 1Q 2007 results and is raising their EPS guidance for 2007 by about 5% when compared to their original projections. See article at Yahoo! Finance.
MRK was up big-time on the news - up over 3.5% to $48 in after hours trading. I believe we will also see some upgrades on MRK in the coming days, likely to sector outperform or overweight. Apart from their 3.3% dividend yield, which is very nice for a company showing the growth and results they are having, the cards are stacking up nicely for MRK to perhaps reach their all-time high levels of $90+ per share in the coming 3-4 years.
I know it is typically buy on rumor, sell on news, but this might be a little different considering their blow out guidance is well above what anyone expected. I do expect a strong Friday, and likely some profit taking over the next couple of days, but reaching $50 per share is very likely in the coming weeks.
MRK has solid financials and a great drug pipeline, developed both through internal R&D and strategic acquisitions. I am not a huge MRK advocate, as everyone knows about it, but this is a great retirement investment. Even with the recent climb in price, the market is open 9:30am-4:00pm, Monday-Friday - any time within that framework is a good time to buy if you have a 10+ year time horizon.
Also, to continue gloating about the 'expert' saying PFE is a better pick than MRK, well, it's now Terence 2, Experts 0.
FYI, I own PFE as well for myself and my daugthers via their DSPP - same as in MRK - and I believe that PFE will do well in the long term and continue to raise their annual dividend. MRK's success should also spillover some into the PFE realm. PFE was up 1.6% today and up another 0.5% after hours on the MRK news.
Showing posts with label mrk. Show all posts
Showing posts with label mrk. Show all posts
Thursday, April 12, 2007
Sunday, March 4, 2007
2007 - The Year of the Owner - The Week Ahead & The Week Past
Last week, the stock market suffered its worst week in over 4 years. Everything was hit hard last week - and not just here in the USA, but overseas as well. The biggest loser was the Chinese stock market, losing 9% in a single day. European markets took big hits - this was especially noted by NBG declining 11%+ from its recent $11.25 high to close the week at a little over $10.00 per share.
Honestly, in short, I have not seen anything like this in years, or maybe ever. Sure, it has happened before, and long term, this will be yet another blip on the stock market's radar (knock on wood), but just about everything was down. Typically, you see general market weakness, but maybe a particular sector or industry shows strength. For instance, technology may be down, but energy or natural resources may be up. Not this time - everything was down - energy, materials, transportation, financial services, technology, etc. Greenspan coming out of the weeds to comment about a possible recessions by the end of the year did not help the cause of stocks.
Here is my take on it, for what it is worth. I think that last week's action was very health in terms of a correction. Although it would be nice if it could, the stock market cannot go up in a straight line forever. Even with last week's loss, the markets are still up 10% from a year go. If you take a look at my Marketocracy fund, even after last week's debacle, my fund is still up 0.9% YTD and while the NASDAQ, Dow Jones, and S&P 500 have not been as fortunate (down 2%, 2.8%, and 1.9% respectively). All I am saying, is that this is not the end of the world.
I think that the U.S. economic outlook does look good for 2007 as does the outlook for the entire global economy. I think that we will see growth in the stock market, but there will be an even increasingly strong focus on fundamentally sound and cash generating companies. I think this is so because even amidst last weeks problems, Merck (NYSE: MRK) and AIG (NYSE: AIG) both performed well as both reported very positive outlooks and results and MRK even got an upgrade. Simply put, the market is ready to reward companies that produce strong financial results, but those that are lagging will be susceptible to correction.
There is still a lot of value out there - even after the big run up, the stocks I am in still look cheap from a long term standpoint, especially NBG, PFE, MRK, SEB, and ASHG. I will be looking to add to all of these positions. Of course, I am in the automatic investing plans with PFE and MRK, so those are forgone conclusions. I added 15% to my NBG position last week and will look to increase some more, perhaps in the Spring, post dividend (assuming there is one), as that is when, at least historically, NBG trades a little weaker. If NBG can stick to their projections outlined in their 2007-2009 presentation, this one is worth $24-$28 in the next 2-3 years.
For 2007, I would like to increase my position in ASHG by 50%-100%, especially considering their recent stock activity, raising their dividend by 5%, and I expect strong financial improvements from this company to hit in 2008-2009 as their huge capital expenditures (e.g., Nevada plant development and Arkansas plant expansion) come online. Although it has not been a huge factor yet, I still believe that ASHG being the largest American owned Cement producer in the USA will be a very strong factor for this company - perhaps even a geo-political one. We'll see.
Seaboard Corp (AMEX: SEB) still looks very cheap from a long term perspective and I am very tempted to add more to my position at this time, but will wait until after they report their financial results (due out this week, I think, as they keep a tight lid on it). SEB still is a cash producing machine and are a very diverse entity - they still also appear to be undervalued from a fundamental standpoint - especially after being down 13% from their recent all-time high of $2,300, which just happened 2 weeks ago. SEB is still trading at less than 1x sales, less than 10x earnings, and about 6.4x Enterprise Value/EBITDA. Also, keep in mind that these ratios are based off of the trailing 12 months (ttm) financial results, and I expect when SEB posts their financial results, we will see an increase in sales, a stronger balance sheet, stronger EBITDA, stronger EPS, and stronger free cash flow. The joys about SEB is that because of lack of analyst coverage, the stock is not as subject to 'analyst estimates' and you can focus more on the financials and cash produced by SEB rather than market hype. Short-term, this fact may also prevent SEB from reaching its full-term value, but long term, this is good. It enables you to add more to your position cheaply and long term, companies with this tight share structure and strong financials tend, at least over the long-haul, tend to become 'overvalued', which is a great place to be if you are an owner.
Ok - that is my sales pitch for those stocks, but it is a perfect transition into my thoughts about Greenspan's comments. I do think that the economy is strong and that the environment is good for companies in terms of being able to produce cash flow. I do, however, that we will see some recession-type effects here in the US. I am unsure of how broad they will impact the country or the stock markets, but the impact of American's not saving, high foreclosure rates, getting in over their heads via credit cards, etc. will take a toll. I am no expert economist, but I just don't know how people live the lifestyles they do now-a-days in terms of what they make, what they have, etc. For private individuals, the behavior is not sustainable and I think we will see some fall out of that in the coming months, which will likely impact financial results of companies in late 2007 and early 2008. The impact will be especially true with businesses that serve the individual consumer, especially in businesses that serve the "middle class." Banks will do fine - businesses that service other businesses will do fine - companies that produce cash and shareholder's equity, and reward owners via dividends and stock buy backs, at good clips will be fine.
Simplistically, 2007 is the year for the owner - not the investor. Granted, there are some years where being an 'investor' would serve you better than acting as an owner - where you looked for aggressive capital appreciation based on market dynamics, momentum, etc. Of course, there will be opportunities along those lines this year, as they always are, but I don't see a broad technology rally or sector rally where you can just ride the wave.
Look for opportunities where being an owner makes sense - where you feel you are getting some value for your investment/purchase - where if you were actually going to 'own' the company (which you do, but you know what I mean), you would feel good about forking over the money to get in on it because you know you are getting a good deal. Buy backs, dividends, cash flow, shareholders equity - those are the things to look for and I believe the stock market will reward shareholders appropriately for such (e.g., higher price per share).
To quote Gordon Gekko:
"The richest one percent of this country owns half our country's wealth, five trillion dollars...You got ninety percent of the American public out there with little or no net worth. I create nothing. I own."
Honestly, in short, I have not seen anything like this in years, or maybe ever. Sure, it has happened before, and long term, this will be yet another blip on the stock market's radar (knock on wood), but just about everything was down. Typically, you see general market weakness, but maybe a particular sector or industry shows strength. For instance, technology may be down, but energy or natural resources may be up. Not this time - everything was down - energy, materials, transportation, financial services, technology, etc. Greenspan coming out of the weeds to comment about a possible recessions by the end of the year did not help the cause of stocks.
Here is my take on it, for what it is worth. I think that last week's action was very health in terms of a correction. Although it would be nice if it could, the stock market cannot go up in a straight line forever. Even with last week's loss, the markets are still up 10% from a year go. If you take a look at my Marketocracy fund, even after last week's debacle, my fund is still up 0.9% YTD and while the NASDAQ, Dow Jones, and S&P 500 have not been as fortunate (down 2%, 2.8%, and 1.9% respectively). All I am saying, is that this is not the end of the world.
I think that the U.S. economic outlook does look good for 2007 as does the outlook for the entire global economy. I think that we will see growth in the stock market, but there will be an even increasingly strong focus on fundamentally sound and cash generating companies. I think this is so because even amidst last weeks problems, Merck (NYSE: MRK) and AIG (NYSE: AIG) both performed well as both reported very positive outlooks and results and MRK even got an upgrade. Simply put, the market is ready to reward companies that produce strong financial results, but those that are lagging will be susceptible to correction.
There is still a lot of value out there - even after the big run up, the stocks I am in still look cheap from a long term standpoint, especially NBG, PFE, MRK, SEB, and ASHG. I will be looking to add to all of these positions. Of course, I am in the automatic investing plans with PFE and MRK, so those are forgone conclusions. I added 15% to my NBG position last week and will look to increase some more, perhaps in the Spring, post dividend (assuming there is one), as that is when, at least historically, NBG trades a little weaker. If NBG can stick to their projections outlined in their 2007-2009 presentation, this one is worth $24-$28 in the next 2-3 years.
For 2007, I would like to increase my position in ASHG by 50%-100%, especially considering their recent stock activity, raising their dividend by 5%, and I expect strong financial improvements from this company to hit in 2008-2009 as their huge capital expenditures (e.g., Nevada plant development and Arkansas plant expansion) come online. Although it has not been a huge factor yet, I still believe that ASHG being the largest American owned Cement producer in the USA will be a very strong factor for this company - perhaps even a geo-political one. We'll see.
Seaboard Corp (AMEX: SEB) still looks very cheap from a long term perspective and I am very tempted to add more to my position at this time, but will wait until after they report their financial results (due out this week, I think, as they keep a tight lid on it). SEB still is a cash producing machine and are a very diverse entity - they still also appear to be undervalued from a fundamental standpoint - especially after being down 13% from their recent all-time high of $2,300, which just happened 2 weeks ago. SEB is still trading at less than 1x sales, less than 10x earnings, and about 6.4x Enterprise Value/EBITDA. Also, keep in mind that these ratios are based off of the trailing 12 months (ttm) financial results, and I expect when SEB posts their financial results, we will see an increase in sales, a stronger balance sheet, stronger EBITDA, stronger EPS, and stronger free cash flow. The joys about SEB is that because of lack of analyst coverage, the stock is not as subject to 'analyst estimates' and you can focus more on the financials and cash produced by SEB rather than market hype. Short-term, this fact may also prevent SEB from reaching its full-term value, but long term, this is good. It enables you to add more to your position cheaply and long term, companies with this tight share structure and strong financials tend, at least over the long-haul, tend to become 'overvalued', which is a great place to be if you are an owner.
Ok - that is my sales pitch for those stocks, but it is a perfect transition into my thoughts about Greenspan's comments. I do think that the economy is strong and that the environment is good for companies in terms of being able to produce cash flow. I do, however, that we will see some recession-type effects here in the US. I am unsure of how broad they will impact the country or the stock markets, but the impact of American's not saving, high foreclosure rates, getting in over their heads via credit cards, etc. will take a toll. I am no expert economist, but I just don't know how people live the lifestyles they do now-a-days in terms of what they make, what they have, etc. For private individuals, the behavior is not sustainable and I think we will see some fall out of that in the coming months, which will likely impact financial results of companies in late 2007 and early 2008. The impact will be especially true with businesses that serve the individual consumer, especially in businesses that serve the "middle class." Banks will do fine - businesses that service other businesses will do fine - companies that produce cash and shareholder's equity, and reward owners via dividends and stock buy backs, at good clips will be fine.
Simplistically, 2007 is the year for the owner - not the investor. Granted, there are some years where being an 'investor' would serve you better than acting as an owner - where you looked for aggressive capital appreciation based on market dynamics, momentum, etc. Of course, there will be opportunities along those lines this year, as they always are, but I don't see a broad technology rally or sector rally where you can just ride the wave.
Look for opportunities where being an owner makes sense - where you feel you are getting some value for your investment/purchase - where if you were actually going to 'own' the company (which you do, but you know what I mean), you would feel good about forking over the money to get in on it because you know you are getting a good deal. Buy backs, dividends, cash flow, shareholders equity - those are the things to look for and I believe the stock market will reward shareholders appropriately for such (e.g., higher price per share).
To quote Gordon Gekko:
"The richest one percent of this country owns half our country's wealth, five trillion dollars...You got ninety percent of the American public out there with little or no net worth. I create nothing. I own."
Sunday, December 31, 2006
Closing Out 2006 - Winners & Losers
I spent last night working on my taxes for 2006 - yeah, I know, tons of fun. Although I have an accountant prepare my final return, I prefer to do as much of the prep work as possible to avoid having to pay CPA rates for things that are pretty easy and that programs like Quicken automatically generate for you. Plus, I was able to complete a couple of full returns myself - the ones for my daughter and the one for my corporation.
I learned more about "qualified dividends" which I should have already known more about, but I didn't - but, now I do :-). What I thought was great was that if you hold a stock that pays dividends long enough (61+ days basically), all dividends on that stock going forward become qualified dividends. Qualified dividends get taxed at a lower tax rate than ordinary dividends. Basically, from a long term standpoint, if you can accumulate stocks that pay dividends, ultimately, all dividends from that stock get a lower tax rate. So, say one day, after many years, you were able to own 50,000 shares of PFE. With the dividend currently at $1.16 - and let's just assume it stays there for now and forever (not likely as they have 40 straight years of dividend increases) you would receive $58,000 in dividend income. And let's assume this $58,000 is your only income. Since the stock has been held on for so long, it is in the form of qualified dividends. So, you would only pay the 15% tax rate on this - rather than 28%-35%. That's a pretty big savings in terms of paying taxes. Let's hope this legislation stays in place.
I also prepared my own Schedule D. Schedule D is the form that you fill out to list capital gains and losses you experienced during the year, primarily through investing in stocks. This is a good exercise to do because you really see how you actually did. You will find most people talk only about their winners, but never talk about their losers. I had a very solid year in this arena - mostly because I had a couple of big winners and was able to limit my losses quickly.
Furthermore, I significantly moved away from "day trading" which I used to do in the past with greater frequency. I did have some success in it in the past, but by going through the actual work, you can see how small incremental gains can quickly be chewed up by larger losses that you are vulnerable to when you maintain too much of a short-term focus.
Here is a great example...one of my best performers of the year, CECE. My average purchase price was $4.35/share with various purchases in 2005. My average selling price on that block of shares was $9.53, which is a 120% return. However, during the course of the run up from $4 to $13, the stock, for instance, would go from $4 to $7, back to $5.50. So, if my focus was too short-term, I would have bailed when it dropped back to $6 - sure, locking in a gain, but being distracted by the dynamics of short-term trading, I would have missed out on the larger gains.
Furthermore with CECE, after exiting the position with a gain, you always tend to feel "what if I am missing out", I bought some shares back thinking it would go back up or I'd get a quick scalp. I bought back in at an average of $9.32 and sold at an average of $9.05 a day or so later - a 2.7% loss - cutting into my gains. Turns out, I didn't miss out - CECE fell down to $7 shortly thereafter and although it rebounded back to $11 temporarily, it's at around $9.00 right now - so, I never missed the boat.
Other winners I had this year that I either closed out the position or have held on include the following.
ASTE - +38.9% (closed out)
SVVS - +17.3% (closed out, too early though, as this one ran)
RDTA - +23.1% (made some dumb trades that cut into return)
ASHG - +15.7% (1-year performance, hold)
MRK - +11,4% (Aug 2006-present, hold)
NBG - +10.1% (Sep 2006-present, hold)
SEB - +36.4% (Oct 2006-present, hold)
And, yes, I had losers - but I did a great job of cutting my losers before they got too bad. I was planning on cleaning up the portfolio on the last day of the year to sell off any losers, but I really didn't have that much of a problem as the only loser I held was LRT, down 12%.
Other losers I sold off this year before they became too bad. Note my actual loss and how much worse they could have gotten. These were mostly attempts to be 'short term' trades - and they didn't work out too well from a short term standpoint, but could have been a disaster long term.
HYBT - down 7.7% (rather 73.2%)
ATVE- down 12.2% (rather than 88.7%)
NSLT- down 5.6% (rather than 11.2%)
GHLT- down 0.8% (rather than 77.2%)
Since I was able to focus on the winners - rather than the losers and cut my losses, I was able to have a pretty strong year in this arena.
I learned more about "qualified dividends" which I should have already known more about, but I didn't - but, now I do :-). What I thought was great was that if you hold a stock that pays dividends long enough (61+ days basically), all dividends on that stock going forward become qualified dividends. Qualified dividends get taxed at a lower tax rate than ordinary dividends. Basically, from a long term standpoint, if you can accumulate stocks that pay dividends, ultimately, all dividends from that stock get a lower tax rate. So, say one day, after many years, you were able to own 50,000 shares of PFE. With the dividend currently at $1.16 - and let's just assume it stays there for now and forever (not likely as they have 40 straight years of dividend increases) you would receive $58,000 in dividend income. And let's assume this $58,000 is your only income. Since the stock has been held on for so long, it is in the form of qualified dividends. So, you would only pay the 15% tax rate on this - rather than 28%-35%. That's a pretty big savings in terms of paying taxes. Let's hope this legislation stays in place.
I also prepared my own Schedule D. Schedule D is the form that you fill out to list capital gains and losses you experienced during the year, primarily through investing in stocks. This is a good exercise to do because you really see how you actually did. You will find most people talk only about their winners, but never talk about their losers. I had a very solid year in this arena - mostly because I had a couple of big winners and was able to limit my losses quickly.
Furthermore, I significantly moved away from "day trading" which I used to do in the past with greater frequency. I did have some success in it in the past, but by going through the actual work, you can see how small incremental gains can quickly be chewed up by larger losses that you are vulnerable to when you maintain too much of a short-term focus.
Here is a great example...one of my best performers of the year, CECE. My average purchase price was $4.35/share with various purchases in 2005. My average selling price on that block of shares was $9.53, which is a 120% return. However, during the course of the run up from $4 to $13, the stock, for instance, would go from $4 to $7, back to $5.50. So, if my focus was too short-term, I would have bailed when it dropped back to $6 - sure, locking in a gain, but being distracted by the dynamics of short-term trading, I would have missed out on the larger gains.
Furthermore with CECE, after exiting the position with a gain, you always tend to feel "what if I am missing out", I bought some shares back thinking it would go back up or I'd get a quick scalp. I bought back in at an average of $9.32 and sold at an average of $9.05 a day or so later - a 2.7% loss - cutting into my gains. Turns out, I didn't miss out - CECE fell down to $7 shortly thereafter and although it rebounded back to $11 temporarily, it's at around $9.00 right now - so, I never missed the boat.
Other winners I had this year that I either closed out the position or have held on include the following.
ASTE - +38.9% (closed out)
SVVS - +17.3% (closed out, too early though, as this one ran)
RDTA - +23.1% (made some dumb trades that cut into return)
ASHG - +15.7% (1-year performance, hold)
MRK - +11,4% (Aug 2006-present, hold)
NBG - +10.1% (Sep 2006-present, hold)
SEB - +36.4% (Oct 2006-present, hold)
And, yes, I had losers - but I did a great job of cutting my losers before they got too bad. I was planning on cleaning up the portfolio on the last day of the year to sell off any losers, but I really didn't have that much of a problem as the only loser I held was LRT, down 12%.
Other losers I sold off this year before they became too bad. Note my actual loss and how much worse they could have gotten. These were mostly attempts to be 'short term' trades - and they didn't work out too well from a short term standpoint, but could have been a disaster long term.
HYBT - down 7.7% (rather 73.2%)
ATVE- down 12.2% (rather than 88.7%)
NSLT- down 5.6% (rather than 11.2%)
GHLT- down 0.8% (rather than 77.2%)
Since I was able to focus on the winners - rather than the losers and cut my losses, I was able to have a pretty strong year in this arena.
Wednesday, October 18, 2006
The $100 Million Family Trust - Automatic Investing & Direct Stock Purchase Plans
Today, I started my first ever automatic investing plan and signed up for my direct stock purchase plan with Merck (NYSE: MRK). Of course, I have made investing an integral part of my financial strategy, but not like this.
First, thanks to SogoInvest.com, you can easily set up automatic investing plans for as little as $1.00 per trade. Regular stock trades are only $1.50-$3.00 each, which is better than anything I have ever seen. There is also no minimum balance to open an account and for the first 90 days, trades are $1. This is awesome. Even if you do not trade a lot, the cheap commissions are key. For instance, say you have $100 to invest and you want to buy a couple of shares of MRK at $44/share. Well, excluding the fact that at most brokers you have to deposit anywhere from $500 to $2,500 just to open the account, you will be paying anywhere from $7 to $15 for the trade. So, if you wanted to put aside $100 each month and buy MRK, well, at the end of the year, you would have put aside $1,200 and paid $120 in commissions...that is 10% of your investment. If you can get those trades for say $1 each, then you are only down 1% of your investment. It really makes a difference in terms of being able to have all of your money go to investing rather than commissions. I only wish I heard about these guys sooner. Sogo's automatic investing plan is pretty sweet. You can schedule your trades in advance (daily, weekly, monthly) and you can specify how much total money you want to invest and how you want to spread it around (e.g., 100% in one stock or 50% each in 2 stocks). They also enable the purchase of fractional shares in the automatic investing plan, so you can get 100% invested in your stocks. For instance, if you put aside $100 and wanted to buy MRK at $44, you would have to only buy 2 shares and have $12 left over. Now, it would let you buy 2.2727 shares of MRK. Big difference over the long term. Anyway, I would check out SogoInvest if you have not opened a trading account or you want to switch. Personally, I have chosen to automatically invest in shares and fractional shares of NBG and SEB through my automatic investment program with Sogo.
The next thing I did was sign up for direct investment purchase plan with Merck. I set up three accounts - 1 for me and 1 for each of my 2 daughters. Basically, direct purchase plans (DPP) allow you to directly invest in the company's stock with out going through an online or regular broker. Typically, the fees are less and they make it very attractive to get involved. For instance, MRK's plan is a $5 set up fee, $2 for each deposit, and $0.01/share commission when purchasing. There is a $5-$10 fee when you want to sell stock. There is no minimum balance as long as you agree to commit $50/mo. via an automated withdrawl each month. You can also come up with $350 upfront. All funds are used for investing in the stock (even in fractional shares) and all dividends are fully reinvested (at your discretion) in more shares of the company. Fees by companies vary. For instance, Quanex (NYSE: NX) has a $15 set up fee and no fees for deposits, purchases, or reinvestments. It's totally free to buy shares, although there is a $50/mo. minimum required investment. Wells Fargo (NYSE: WFC), for instance, has some fees ($10 to set up, $1 per deposit, $0.03/share to buy), but their monthly minimum automatic investment is $25.00.
So, why the sudden motivation to start this?
Well, first, they say the best way to save and build wealth for yourself is to get into the habit of saving and maintain the discipline to put aside even if just a little bit each month. Whether it is $20 or $100 or whatever, you should just do it or find a way to do it. And, while that is not easy, the trick is, where do you put it.
Obviously, if it is 'savings', you probably want it to be in something stable and consistent, and not things that are volatile. Besides, this is for the long term or for an emergency or to buy a house one day and you want to have some confidence in the future value of these savings. Unfortunately, most people opt to put money in savings accounts or bank CDs. Not for me.
Even if you are totally risk averse and want 'guaranteed' (note that nothing is guaranteed) return, you can do a lot better putting your money into a bond fund of some sort.
Why do I say this, banks are not just necessary evils, they are thieves. I mean, not only do we all just give them our money, but then they use our money to make money for themselves....and charge us fees for doing so!!! Talk about the double dip, I mean really. Actually a triple dip...because more often than not, they do not give you anything back in return for you giving them your money. Sometimes, you get interest, but it is very small and there are minimum balances, etc. I just don't believe it.
Wait a second, Terence, you say....but, don't you own stock in a bank (e.g., National Bank of Greece, NYSE: NBG).
Actually, I am glad you brought that up. Banks are thieves and therefore can make a lot of money and can be good investments, just not the best place to park your money.
So, ok, I answered your question where not to park your money, so natuarally, where do you park it? For the automatic investment plans, I have opted to enlist in those offered by MRK, perhaps WFC, and maybe NX. I might do WFC in the next couple of months, but will start with MRK now. MRK's DPP Web Site & Information.
I chose MRK because I believe in the company's stability and ability to deliver shareholder value over the long term. I keep pretty good track of my finances via Quicken, but for these accounts, I am not going to record them as an asset. Basically, it is going to be like I spent the money and it disappears. Of course, I know I'll have them, but I won't look at them every day. I think this is part of the discipline that will make it easier to make this strategy successful. I have my contributions clearly delineated so I can track contributions to the DPP, but I will not actually see its performance day to day.
Anyway, back to the original point, "Why MRK?". Well, again, I believe in their long term ability to drive shareholder value through both price appreciations and dividend yield. Currenty yield (or payout) is about 3.5% - the dividends alone beats just about any savings or money market account you can get at a bank. If you invested $100 in MRK back in 1984-2004 and simply re-invested the dividends and did not buy any more along the way, it would be worth over $2,200 today. Compare to a 5% CD during th esame time period and your $100 would be worth $265. If you go back even further to the 1970s and earlier, the MRK return is even more impressive.
That is the goal here. Not only to just have it there 20, 30, 40 years from now - but to continually add to the position and re-invest all dividends to purchase more shares. Maybe I'll have enough shares to be on the board of MRK - that'd be cool.
The other thing that really opened my eyes to this strategy was an article I read about some of the wealthiest families in the country. Most of these people you have not heard of, but they are worth tens of millions if not hundreds of millions of dollars. How did they do it? Well, they inherited it in many cases, but these people that analyzed the holdings of these families. Large blocks of their worth was tied up in the big name stocks, blue chip stocks - GE, MRK, IBM, JNJ (Johnson & Johnson), KO (Coke), AXP (American Express). Strong histories and operations coupled with strong dividend payouts that simply got reinvested in more shares of the stock.
So, that is where I am at. I probably won't make tens of millions or hundreds of millions of dollars during my life. I might, but probably not. But, I want to see if things I do today can create that opportunity for my daughters and perhaps their children as well to be in that position. No promises, but automatically investing, re-investing dividends, & taking advantage of direct purchase plans with their lower fees & ease of effectively investing in small incremental amounts - these are all steps in the right direction to building that legacy.
First, thanks to SogoInvest.com, you can easily set up automatic investing plans for as little as $1.00 per trade. Regular stock trades are only $1.50-$3.00 each, which is better than anything I have ever seen. There is also no minimum balance to open an account and for the first 90 days, trades are $1. This is awesome. Even if you do not trade a lot, the cheap commissions are key. For instance, say you have $100 to invest and you want to buy a couple of shares of MRK at $44/share. Well, excluding the fact that at most brokers you have to deposit anywhere from $500 to $2,500 just to open the account, you will be paying anywhere from $7 to $15 for the trade. So, if you wanted to put aside $100 each month and buy MRK, well, at the end of the year, you would have put aside $1,200 and paid $120 in commissions...that is 10% of your investment. If you can get those trades for say $1 each, then you are only down 1% of your investment. It really makes a difference in terms of being able to have all of your money go to investing rather than commissions. I only wish I heard about these guys sooner. Sogo's automatic investing plan is pretty sweet. You can schedule your trades in advance (daily, weekly, monthly) and you can specify how much total money you want to invest and how you want to spread it around (e.g., 100% in one stock or 50% each in 2 stocks). They also enable the purchase of fractional shares in the automatic investing plan, so you can get 100% invested in your stocks. For instance, if you put aside $100 and wanted to buy MRK at $44, you would have to only buy 2 shares and have $12 left over. Now, it would let you buy 2.2727 shares of MRK. Big difference over the long term. Anyway, I would check out SogoInvest if you have not opened a trading account or you want to switch. Personally, I have chosen to automatically invest in shares and fractional shares of NBG and SEB through my automatic investment program with Sogo.
The next thing I did was sign up for direct investment purchase plan with Merck. I set up three accounts - 1 for me and 1 for each of my 2 daughters. Basically, direct purchase plans (DPP) allow you to directly invest in the company's stock with out going through an online or regular broker. Typically, the fees are less and they make it very attractive to get involved. For instance, MRK's plan is a $5 set up fee, $2 for each deposit, and $0.01/share commission when purchasing. There is a $5-$10 fee when you want to sell stock. There is no minimum balance as long as you agree to commit $50/mo. via an automated withdrawl each month. You can also come up with $350 upfront. All funds are used for investing in the stock (even in fractional shares) and all dividends are fully reinvested (at your discretion) in more shares of the company. Fees by companies vary. For instance, Quanex (NYSE: NX) has a $15 set up fee and no fees for deposits, purchases, or reinvestments. It's totally free to buy shares, although there is a $50/mo. minimum required investment. Wells Fargo (NYSE: WFC), for instance, has some fees ($10 to set up, $1 per deposit, $0.03/share to buy), but their monthly minimum automatic investment is $25.00.
So, why the sudden motivation to start this?
Well, first, they say the best way to save and build wealth for yourself is to get into the habit of saving and maintain the discipline to put aside even if just a little bit each month. Whether it is $20 or $100 or whatever, you should just do it or find a way to do it. And, while that is not easy, the trick is, where do you put it.
Obviously, if it is 'savings', you probably want it to be in something stable and consistent, and not things that are volatile. Besides, this is for the long term or for an emergency or to buy a house one day and you want to have some confidence in the future value of these savings. Unfortunately, most people opt to put money in savings accounts or bank CDs. Not for me.
Even if you are totally risk averse and want 'guaranteed' (note that nothing is guaranteed) return, you can do a lot better putting your money into a bond fund of some sort.
Why do I say this, banks are not just necessary evils, they are thieves. I mean, not only do we all just give them our money, but then they use our money to make money for themselves....and charge us fees for doing so!!! Talk about the double dip, I mean really. Actually a triple dip...because more often than not, they do not give you anything back in return for you giving them your money. Sometimes, you get interest, but it is very small and there are minimum balances, etc. I just don't believe it.
Wait a second, Terence, you say....but, don't you own stock in a bank (e.g., National Bank of Greece, NYSE: NBG).
Actually, I am glad you brought that up. Banks are thieves and therefore can make a lot of money and can be good investments, just not the best place to park your money.
So, ok, I answered your question where not to park your money, so natuarally, where do you park it? For the automatic investment plans, I have opted to enlist in those offered by MRK, perhaps WFC, and maybe NX. I might do WFC in the next couple of months, but will start with MRK now. MRK's DPP Web Site & Information.
I chose MRK because I believe in the company's stability and ability to deliver shareholder value over the long term. I keep pretty good track of my finances via Quicken, but for these accounts, I am not going to record them as an asset. Basically, it is going to be like I spent the money and it disappears. Of course, I know I'll have them, but I won't look at them every day. I think this is part of the discipline that will make it easier to make this strategy successful. I have my contributions clearly delineated so I can track contributions to the DPP, but I will not actually see its performance day to day.
Anyway, back to the original point, "Why MRK?". Well, again, I believe in their long term ability to drive shareholder value through both price appreciations and dividend yield. Currenty yield (or payout) is about 3.5% - the dividends alone beats just about any savings or money market account you can get at a bank. If you invested $100 in MRK back in 1984-2004 and simply re-invested the dividends and did not buy any more along the way, it would be worth over $2,200 today. Compare to a 5% CD during th esame time period and your $100 would be worth $265. If you go back even further to the 1970s and earlier, the MRK return is even more impressive.
That is the goal here. Not only to just have it there 20, 30, 40 years from now - but to continually add to the position and re-invest all dividends to purchase more shares. Maybe I'll have enough shares to be on the board of MRK - that'd be cool.
The other thing that really opened my eyes to this strategy was an article I read about some of the wealthiest families in the country. Most of these people you have not heard of, but they are worth tens of millions if not hundreds of millions of dollars. How did they do it? Well, they inherited it in many cases, but these people that analyzed the holdings of these families. Large blocks of their worth was tied up in the big name stocks, blue chip stocks - GE, MRK, IBM, JNJ (Johnson & Johnson), KO (Coke), AXP (American Express). Strong histories and operations coupled with strong dividend payouts that simply got reinvested in more shares of the stock.
So, that is where I am at. I probably won't make tens of millions or hundreds of millions of dollars during my life. I might, but probably not. But, I want to see if things I do today can create that opportunity for my daughters and perhaps their children as well to be in that position. No promises, but automatically investing, re-investing dividends, & taking advantage of direct purchase plans with their lower fees & ease of effectively investing in small incremental amounts - these are all steps in the right direction to building that legacy.
Tuesday, September 5, 2006
Investment Ideas: Merck (NYSE: MRK) vs. Pfizer (NYSE: PFE)
This weekend, there was an article published at MarketWatch.com called "Merck vs. Pfizer", and it was about which was the better investment, MRK or PFE. If you are not familiar with these companies, these are two of the more prominent drug-makers/pharmaceutical companies in the world. MRK is the manufactuer of Vioxx, which has been all over the news because of the lawsuits surrounding deaths related to Vioxx use and MRK's voluntary recall. Pfizer is the maker of Viagra and also makes a lot of over the counter medicines such as Rolaids and Benadryl. Both companies literally have hundreds and hundreds of prescription and non-prescription drugs in their catalog.
Anyway, the point of the article is just what it says...who to invest in if you had to choose between them. In short, both companies are well off their all-time highs and have not performed well in the stock market the past couple of years, despite the growth and strong numbers they have achieved. However, times seem to be changing for both of them and each company seems to be on the rise. PFE is currently trading at $27.96 and MRK at $40.96 (MRK is a Dark Side Stock Pick at $39.65).
The article suggests that PFE is a better buy and over the next 2-5 years will give an investor a return of 74%-118% vs. MRK offering 31%-66%.
I have to disagree with this claim. I believe that MRK is the better buy and will return superior returns to PFE over the coming years.
1. MRK has had more law suit problems than PFE and these lawsuit problems have put pressure on the stock. However, MRK's product line is diverse and ultimately, these lawsuits will subside. PFE has had their share of legal problems, of coursem but the MRK ones have been more widely publicized, it seems. This is a downward pressure element that once removed, will allow MRK to move up more quickly than PFE that is essentially through their legal problem phases for the time being.
2. MRK has superior financial ratios across the board. MRK has more revenue per share, more cash per share, a 'cheaper' price to earnings ratio (both current and estimated), a cheaper price to growth ratio, a better debt position, and better return on equity and return on assets (despite MRK having lower operating and profit margins than PFE). MRK also has better year over year (yoy) revenue growth and earnings per share (EPS). In short, every major financial ratio points to MRK being a better 'value buy.' Compare MRK Key Statistics to PFE Key Statistics.
3. The article speaks that PFE has a bigger liquidity or buy out premium meaning that PFE is likely to fetch a higher buying price should they get bought out. I do not think this makes sense either as PFE is over 2 times as large as MRK and typically, the larger firms acquire the smaller firms. I do not believe that a merger of sorts is in the work for either of these companies anytime soon, however, I think MRK would stand to gain more from a buy out vs. PFE.
One thing that is in PFE's favor is the dividend yield. MRK has historically yielded 3.5%-3.7% in dividends to its investors; this is right in line with where it is currently at. PFE, on the other hand, has averaged a 2.1% yield over the same time period and it is currently at a 3.3% yield. So, this may suggest that the stock price would correct or be more likely to rise. The dividend yield is calculated by taking the annual dividend per share and dividing by the stock price. So, if PFE were to return to a 2.1% yield and be paying out the same dividend, the stock price would have to be at $46-$47 per share. Of course, one can argue that MRK has had a longer, stronger history of paying out higher dividends. It also seems that PFE is trying to play catch up in this arena. The dividend payout per quarter per share has grown from $0.11 to $0.24 since 2001, a 118% increase. MRK's has grown from $0.34 to $0.38, an 11% increase. This may also suggest that PFE is growing at a faster rate than MRK and is able to pay out more dividends, but I think this is more of a function of just paying out more of the available income to shareholders rather than representative of faster revenue growth. At some stage, companies mature, and it is in the best interest of the shareholders to distribute more cash out to the shareholders rather than retain it and keep it in the bank to grow.
All in all, both are good stock picks at this stage, I think, and both should do well over the next 12-24 months, barring any form of disaster, which is possible. But, I personally see MRK as a superior buy when compared to PFE.
Anyway, the point of the article is just what it says...who to invest in if you had to choose between them. In short, both companies are well off their all-time highs and have not performed well in the stock market the past couple of years, despite the growth and strong numbers they have achieved. However, times seem to be changing for both of them and each company seems to be on the rise. PFE is currently trading at $27.96 and MRK at $40.96 (MRK is a Dark Side Stock Pick at $39.65).
The article suggests that PFE is a better buy and over the next 2-5 years will give an investor a return of 74%-118% vs. MRK offering 31%-66%.
I have to disagree with this claim. I believe that MRK is the better buy and will return superior returns to PFE over the coming years.
1. MRK has had more law suit problems than PFE and these lawsuit problems have put pressure on the stock. However, MRK's product line is diverse and ultimately, these lawsuits will subside. PFE has had their share of legal problems, of coursem but the MRK ones have been more widely publicized, it seems. This is a downward pressure element that once removed, will allow MRK to move up more quickly than PFE that is essentially through their legal problem phases for the time being.
2. MRK has superior financial ratios across the board. MRK has more revenue per share, more cash per share, a 'cheaper' price to earnings ratio (both current and estimated), a cheaper price to growth ratio, a better debt position, and better return on equity and return on assets (despite MRK having lower operating and profit margins than PFE). MRK also has better year over year (yoy) revenue growth and earnings per share (EPS). In short, every major financial ratio points to MRK being a better 'value buy.' Compare MRK Key Statistics to PFE Key Statistics.
3. The article speaks that PFE has a bigger liquidity or buy out premium meaning that PFE is likely to fetch a higher buying price should they get bought out. I do not think this makes sense either as PFE is over 2 times as large as MRK and typically, the larger firms acquire the smaller firms. I do not believe that a merger of sorts is in the work for either of these companies anytime soon, however, I think MRK would stand to gain more from a buy out vs. PFE.
One thing that is in PFE's favor is the dividend yield. MRK has historically yielded 3.5%-3.7% in dividends to its investors; this is right in line with where it is currently at. PFE, on the other hand, has averaged a 2.1% yield over the same time period and it is currently at a 3.3% yield. So, this may suggest that the stock price would correct or be more likely to rise. The dividend yield is calculated by taking the annual dividend per share and dividing by the stock price. So, if PFE were to return to a 2.1% yield and be paying out the same dividend, the stock price would have to be at $46-$47 per share. Of course, one can argue that MRK has had a longer, stronger history of paying out higher dividends. It also seems that PFE is trying to play catch up in this arena. The dividend payout per quarter per share has grown from $0.11 to $0.24 since 2001, a 118% increase. MRK's has grown from $0.34 to $0.38, an 11% increase. This may also suggest that PFE is growing at a faster rate than MRK and is able to pay out more dividends, but I think this is more of a function of just paying out more of the available income to shareholders rather than representative of faster revenue growth. At some stage, companies mature, and it is in the best interest of the shareholders to distribute more cash out to the shareholders rather than retain it and keep it in the bank to grow.
All in all, both are good stock picks at this stage, I think, and both should do well over the next 12-24 months, barring any form of disaster, which is possible. But, I personally see MRK as a superior buy when compared to PFE.
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