Schering Plough (NYSE)

...in-depth reviews of stocks from all sectors...

Schering Plough (SGP, NYSE)

I am no longer a great fan of the buy and hold thesis. There are many reasons for this change of heart but the primary one is that the stock market is no longer following the same rules when this kind of investment strategy was working. For an investor to prosper by picking up a stock at any price and holding on  to for a long time, few things must continue to happen. First, you have to be able to pick up quality companies with good future prospects at cheap prices. Ask yourself, in  this internet era of immediate dissemination of all news to all people, where will you find such inefficiency in the market. About the only place you have a chance to buy  these undervalued gems is the small cap and under followed sector of  the market. And that arena is full of potholes, just ask the players on the old Vancouver stock exchange or the new CDNX.

Let's say you were able to  pick up these shares that no one knew about at bargain basement prices. Then you have the arduous task of hanging on to it until such time as everyone loves your stock, If that were to happen, modern trading pattern suggests that soon your  stock will  be trading at 97 times earnings. If you don't believe me, check out a few of the fallen angels on the Nasdaq, many are still trading at close to 100 times. Imagine what people were willing to pay for them when they were six times higher in price. The point is if you don't dump your beloved baby when they are trading at obscene levels, you are likely to face  incredible remorse when the attention shifts and your Nortel comes down to $20 from $120. No, buy and hold is  gone for now. It may come back but there will be a lot of blood spilled  between now and then.

So is there a strategy  that might work in this age of rapid fire information and message chat rooms and fair and full disclosure rules? One strategy that seems obvious and incorruptible is buy low and sell high. It is not buy and hold but buy and sell strategy. All the uncertainties I talked about earlier are still there but at least you have chance to keep some of the money if happened to pick the stock at or near its low. And today, there are quite a few candidates that can qualify as being close to their low's albeit not necessarily undervalued.

Now before you get too excited about this being another pitch to buy Cisco or even Microsoft at fairly lofty P/E multiples, let me assure you that I am still looking for cheap stocks to "buy low" hopefully to sell high. While tech stock massacre is spilling most of the black ink these days, there are other sectors that have high  growth  prospects but suffer for short term events. One such story is Schering-Plough Corporation,(908) 298-4000, a worldwide research-based pharmaceutical company, engaged in the discovery, development, manufacturing and marketing of pharmaceutical products. The Company operates primarily in the prescription pharmaceutical marketplace. However, where appropriate, the Company has sought regulatory approval to switch prescription products to over-the-counter (OTC) status as a means of extending a product's life cycle. In this way, the OTC marketplace is yet another means of maximizing the return on investments in discovery and development.  

All was well with Schering-Plough, trading in the $50 to $60 range earlier this year until in February, it warned that its first-quarter earnings would come in as much as 15 percent below last year's profit of 42 cents a share. Analysts were looking for a profit of 48 cents a share. The problem was regulatory concerns about its drug-manufacturing processes, which must meet FDA guidelines to  go forward. In addition, Schering-Plough said the FDA wouldn't approve Clarinex, a new version of its popular antihistamine Claritin, until the manufacturing issues were resolved. The shares fell $7.07 in a day to close at $41.25 and has since meandered in the $34 to $40 range. Assuming the company does make its $1.63 EPS forecast, current prices make this a cheap stock at around 25  times earnings while maintaining a 41% return on equity. whether this  is a good pick or not will depend upon whether there are further bad  news to come and if the management is able to  solve its current problems.

In his remarks to shareholders, the chairman and chief executive officer, said the company has given itself three benchmarks in addressing these issues: first, to secure the confidence of the U.S. Food and Drug Administration (FDA) concerning its manufacturing systems and controls; second, to assure that Schering-Plough has a culture and a system that will sustain compliance throughout the organization; and third, to reward shareholders with results. To further emphasize their resolve, the company's Board of Directors authorized a 14 percent increase in the quarterly dividend, from 14 cents to 16 cents per share, marking the 18th increase in the dividend since 1986. 

When would I be ready to sell this  stock? There are rumors that Merck wants to buy SGP for $65 a share. That would be a nice pay off but I am not counting on that for that rumor has been around for over three years. On the other hand where there is smoke, there is usually some fire. If you were thinking of buying a company, wouldn't you buy it low.

Last Updated May 14, 2001