Sunday, June 26, 2011

"Apprehension abounds as QE2 ending approaches. If you want to be in the market you better travel with the "Big dogs".

Dow Jones Industrial Average 11934.58  (Down) (7 out of 8 weeks)

I thought it appropriate to watch the TV show, Dual Survival, on the Discovery Channel, while I wrote this weeks blog. This week  Dave Canterbury & Cody Lundin are in South Africa trying to find their way out of a Wild game preserve that is full of Lions, Bull Elephants, and Warthogs and they are well down the food chain and looking like lunch there.  I thought Me and you are the dual ones that need to go back to our survival techniques to not get eaten up alive by this stock market and the lions out there in the bush.

So I have come up with a three part survival technique. One, pick out a sector that you want to diversify into, to balance your portfolio. I chose Pharmaceuticals because I had recently sold a position in that sector. Second, choose a company with a bulletproof balance sheet and low or no debt. Third , to travel with the "Big Dogs", pick a company that a hedge fund investor has taken at least a 5% position in. 

So here is what this discipline led me to:

Forest Laboratories Inc. (Symbol FRX, $39.33) .

This pharma company has a Current ratio of 5.6 to 1 and no long term debt. Who is the "Big Dog" on your team with you? That would be hedge fund manager Carl Icahn who has taken a 6.5% position in the company and has 4 nominees for the board of directors. Earlier in the year Icahn made investments in: Clorox, Amgen, and Southern Union. Mario Gabelli ,George Soros, Joel Greenblatt, and David Dreman were all on-board for the Southern Union trade and all made out nicely.

 Icahn must have been looking at Forest Labs 2011 earnings of $0.94 and 2012 earnings of $3.68 each per share. Or the 12 month Total Return of 43.4% or Net Profit margins of 23.80%. Put that all together with a forward PE of 10.69 and you have to wonder what Carl thinks there is to fix? The company also has $7.24 cents a share just sitting in cash. Maybe he wants to put that money to work?

Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products which require a physician's prescription.

So if you are going to be out in the tall grass and can't see where you are going, you are best advised to hang with one of the "Big Dogs" , and hope for the best.  It should be a fun week. A regular Safari of adventures. Make sure you are not Lion food. Forest Labs seems a safe place to be.


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