Forget Teva Pharmaceutical Industries Ltd (ADR) (TEVA). Buy This Instead.

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Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is the world’s leading generic pharmaceutical company; however, it happens to make most of its profits from specialty drugs related to multiple sclerosis.

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)

Its specialty drugs segment accounted for just segment accounted for just 39.6% of the company’s $21.9 billion in 2016 revenue; however, it generated 58.4% of company’s total segment profit of $8 billion. Richard Band, editor of Profitable Investing, wrote in January that Teva continues to focus more on its generics business, which is less profitable than specialty drugs but looks to turn that around in 2017.

Band believes TEVA stock is very cheap at the moment having dropped 42.7% in 2016 and off another 8.1% year to date through March 10. He reckons that at its current annual dividend yield of 4.1%, Teva is paying you to patiently wait for it to return to normal levels of profitability.

For example, in 2014, it had an operating margin of 19.5%, its best level since 2010, more than twice its operating profit margin this past year. In Band’s mind, “The simple fact is, there’s far less downside than upside at this point. And TEVA stock comes with a very healthy 4.2% dividend [as of Jan. 25] at this point. That pays for your patience as the turnaround begins.” A logical argument, for sure, but Band is paid to understand why this is so… you’re not.

Finding Good Value At Low Prices

Fidelity portfolio manager Joel Tillinghast recently appeared in a Q&A about investing in cheap, small-cap stocks; Japan, in his opinion, is the best place to look for stocks providing good value at low prices.

Consider that a freebie.

A disciple of Peter Lynch, Tillinghast manages the Fidelity Low-Priced Stock Fund (MUTF:FLPSX), a $39 billion behemoth he’s run to great results since its inception in December 1989.

In the Q&A, he speaks to a subject that he clearly learned through Peter Lynch, which is to invest in what you know, something I call “everyday investing” and also subscribe to.

“You don’t precisely get at the investments’ risks that security analysts pay attention to. One of those is making sure that it’s an industry you understand,” Tillinghast answered in response to a question about what investors need to be mindful of when buying low-priced stocks. “Some industries are just baffling to me, like unprofitable biotech stocks — I don’t know how to value them since the science can take any direction. If you’re doing it at home, unless you’re a doctor, stay away from unprofitable biotech.”

Cost of Overconfidence

He’s so right. And yet many retail investors think they know better, and usually this overconfidence ends up costing them real money.

Reread the previous sentence as many times as is necessary to understand that successful investing is often more about knowing what you don’t know than knowing what you do. Tillinghast is honest enough to know he doesn’t understand biotech — frankly, not many people do.

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I believe investors who want to play in this sandbox ought to fully understand the ramifications of the 50% downturn in TEVA stock before committing your real capital.

Most of the commentary about TEVA stock at InvestorPlace.com since the beginning of the year has been extremely positive with the exception of InvestorPlace contributor Joseph Hargett, an options specialist, whose February 22 article pointed out that despite a lot of good news following Teva, analysts were extremely gun shy about upgrading TEVA stock or hiking their 12-month price target, a sign that the pros aren’t 100% sold on Teva’s turnaround.

Alternative for Teva Pharmaceuticals Investors

Now, unless you work in the industry or are a doctor prescribing some of Teva’s drugs, it’s unlikely that you fully understand what’s happening with Teva’s business to the point of ensuring your investment is relatively safe.

My question to you is this — if you were investing your parent’s money would you feel nearly as confident about a positive outcome? I highly doubt it.

The average retail investor, if interested in Teva stock, would be better served by investing in the VanEck Vectors Generic Drugs ETF (NASDAQ:GNRX) which tracks the Global Generics & New Pharma index, a 79-stock portfolio with TEVA as its second-biggest holding at a weighting of 6.0%, as of the end of February.

Over the past 52 weeks, GNRX delivered a total return of -6.1% compared to a 40.7% decline for TEVA stock.

Sure, the upside might not be as great, but the downside won’t be either. Preservation of capital is Warren Buffett’s number one rule; it should be yours as well.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/forget-teva-pharmaceutical-industries-ltd-adr-teva-buy-vaneck-vectors-generic-drugs-etf-gnrx-instead/.

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