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.
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.