Featuring Lutts’ Logic:
Is Toyota a Bargain?
Correction on Network Neutrality
Two Attractive Healthcare Stocks
The recent problems at Toyota, combined with the collapse of the stock, which is now off 19% from its January high, have erstwhile bargain-hunters asking if the stock is a good buy here.
I think not, and here’s why.
Toyota (the company) enjoyed a great long uptrend in its fortunes, thanks to its ability to design and build high-quality cars that were affordable. People grew to trust Toyota more than any other car company on earth. And over the same period, the company’s stock (symbol TM) enjoyed similar growth.
Part of the stock’s growth was absolutely reasonable, reflecting the company’s fundamental achievements, but part of it was irrational, reflecting people’s growing love of the company. And while the stock’s collapse to date may accurately reflect the logical loss of earnings power, I believe it does not yet accurately reflect the loss of that love.
The fact is, in millions of households all over America, people are angry at Toyota for failing them. People who once automatically bought Toyota’s cars because they trusted the company (a fact that was more important to them than any technical feature) will now look elsewhere. Toyota has failed them, and like any lover who’s been disappointed, they will hold a grudge.
One of the truisms in our business is that trends tend to go to extremes. They last longer than expected, and they go higher or lower than expected. And so, I believe, it will be with Toyota. Yes, there will be short-term bounces, and profit opportunities for traders. But Toyota’s best days are over. I wouldn’t touch the stock with a 10-foot pole today.
If you’ve got to own a car company, Ford (F) is still attractive. But that’s a story for another day. Today, I think one of the best sectors for investing is in medicine and health care. More on that below. But first …
Mea Culpa: A week ago I wrote a piece investigating Network Neutrality, trying to educate you as I was educating myself. But I found myself swimming in waters that were deeper than expected, and a couple of readers pointed out that I had missed a crucial aspect of the (still-largely-invisible) Network Neutrality debate. Here is the best.
“I think you misunderstand what exactly people are fighting for when they want net neutrality. … Net neutrality is about making sure every site on the Internet is available to every person and no data is treated differently. What net neutrality is trying to avoid is a Web site only being available on one ISP. An example of this would be having Google only available on Comcast and Yahoo! only available on Verizon. So if a costumer wanted to use Google, they have to use Comcast, and if they wanted to use Yahoo!, they would have to use Verizon. This could get even worse if certain news sites were only available on certain ISPs (like CNN only on Verizon or your Web site only on Comcast). It could get even worse if you had to pay large sums of money to have your site listed on certain ISPs. If this happens it would be the end of the Internet as we know it and this is what net neutrality is trying avoid.
“The second part to neutrality is making sure no data is discriminated against. This means ensuring that data from certain programs are not treated differently. This has already started with ISPs throttling peer-to-peer transfers. But unlike what you said, these are not mostly students illegally sharing files. There are a lot of legal uses, including downloading free open source software and patches for programs. A worse example of this would be ISPs slowing down VOIP traffic from any program that is not their own VOIP client. They could make it so that if you want to use VOIP, you need to pay for it through your ISP. This would be the end of programs like Skype.
“So net neutrality is about keeping the Internet free, allowing competition amongst all websites, and not letting ISPs set up artificial monopolies on what sites you are allowed to access. Anyone who is pro business, pro free trade and pro open access to all information should also think about making sure the Internet stays as open and free as it is now.”
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One rule of momentum investing says that growth stocks that can hit new highs, even when the broad market is weak, are likely to do even better when the pressure comes off the broad market. Think of it like a coiled spring; as soon as the market’s pressure eases, the coil explodes higher. Many growth stocks do something similar.
So last week, as the broad market was tanking, I ran a quick screen, and found a handful of resilient names. Most interesting to me was the strength in healthcare stocks. In effect, investors are now saying that with the much-debated health care bill dead in the water, corporations will be able to carry on in their usual money-making ways. Two of my favorites are below.
Perrigo (PRGO) is the largest U.S. maker of store-brand over-the-counter drugs, making and marketing over 1,300 store brand products and over 250 generic products. These include cough and allergy medicines, gastrointestinal drugs, analgesics, dietary supplements and smoking cessation products.
The company has grown revenues every year of the past decade, and grown earnings every year since 2006. Last Tuesday, it reported fourth quarter results, and they were terrific. Revenues grew 9% to $583 million, while earnings shot up 56% to $0.70 per share. Analysts had been expecting $0.66. Also, the after-tax profit margin was a hefty 11.1%, the best in many years.
In response, buyers bought the stock heavily, pushing it up from 44 to 46 on more than double normal volume. Equally important, this marks a clear breakout above the stock’s 2008 peak of 43. I think it has further to run.
Substantially smaller than Perrigo is EV3 Inc. (EVVV), a Minnesota company whose stock has been coming on strong, climbing from 11 to 15 in the past thee months. Because of this strength, the stock earned a spot in Cabot Top Ten Report last week, and here’s what editor Michael Cintolo wrote.
“EV3 calls itself “Your endovascular company.” Its expertise is the minimally invasive treatment of lower extremity peripheral vascular and neurovascular diseases. The company has developed and acquired a portfolio of devices including stents, guidewires, balloon catheters, thrombectomy catheters, plaque excision systems, embolic protection devices, liquid embolics, embolization coils, flow diversion systems and occlusion balloons. And business is good; revenues have grown every year of the past decade. Looking forward, earnings estimates are up, profit margins are very healthy and growing, and the number of institutional investors is growing, too. In fact, back on January 19, JP Morgan upgraded the stock to “overweight,” setting a price target of 19.”
Mike recommended that subscribers buy the stock between 14 and 15, and the good news is that as the week went by, the stock declined calmly in sympathy with the market, closing at 14. I think it’s a decent buy here.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
Editor’s Note: Discover the strongest stocks in the market with Cabot Top Ten Report! Editor Michael Cintolo combines our proprietary Optimum Momentum stock-screening tool with his expert growth stock advice to select the top 10 stocks in the market each and every week. A new issue was just released today-don’t miss it!