Someone please change the channel. I’m tired of this show. With the markets spiraling lower in a predictable reaction to the slowing economy, investors wanting exposure to the market must stay focused on defense.
Historically one of the most defensive sectors to play was the drug space. Irrespective of a slowing economy, consumers need medicine. Cutting that expense would only happen in dire circumstances.
It’s one of the last things to go in a family budget, and that means drug companies can rely on stable sales no matter the circumstance.
At least that is the theory. In practice, that theory has been tested of late. The large drug companies in the United States have struggled as a result of shallow pipelines for new drugs and old drugs becoming open for competition in the generic market.
That combination has made the group one of the poorest performers over the last 5-year bull market. Does that mean we can buy these stocks today in defense of the forthcoming economic slowdown?
One of the stalwarts in the group is Merck & Co. (MRK). The company is a great example of the troubles in the pharmaceutical space. Over the last 5 years, MRK has seen its stock pummeled in value with shares trading today near their lows.
The problems for MRK were initially triggered by concerns of a weak pipeline. That was followed by the now famous Vioxx recall and the lawsuits that followed. More recently the company has seen set-backs in results from a combo heart drug Vytorin with studies linking the drug to cancer.
The concern with Vytorin resulted in investors selling MRK in a big way. Shares had recovered nicely as the company was recovering and winning many of the Vioxx cases, but the studies put a damper on that enthusiasm.
MRK withdrew 2008 guidance at the time the Vytorin news was released. Without that guidance investors had a hard time valuing the drug behemoth making it easy to sell the stock.
So here we are today with shares trading at its 52-week low of $30 per share. When at these levels in the past, I made MRK a screaming buy. Given the different macro conditions, it is hard to give anything a screaming buy today, but I do think MRK is a reasonable speculation at these levels.
Reasonable speculation is all we can ask for these days. Can I deploy capital in a way whereby I am not taking unmitigated risk where the potential return is commensurate with the risk?
In the case of MRK, I think investors can find a safe haven here. Yes, shares have been weak during the current crisis, but unlike the financials the dividend for MRK is reasonably secure.
At the moment that dividend is near 5%. In essence we get paid while we wait for this economy to get on its feet. As an added bonus, MRK may regain its losses if it can show some positive results for drugs in its pipeline.
I would feel comfortable adding MRK to any defensive portfolio.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
