Value Investor Weekly Reading List

Topic of the week was the plunge of Pfizer.
Since the stock is the darling of many value investors we will focus on it on this issue of the Value Investor Weekly Reading List.
The company stopped clinical trials of torcetrapib. This anti cholesterol drug was supposed to replace Lipitor which represents 25% of drug maker sales. Suddenly Pfizer drug pipeline seems rather dry.

At the end of the column we will submit you also an interesting value play, an intriguing story on analogy between investing and gambling and an entertaining and instructive Warren Buffett video.

First let's talk about Pfizer.

How the failure materialized ? Only two statistically abnormal deaths, in a clinical trial involving 15.000 patients (i.e. 0.02% of the sample), triggered the threesold which, almost on automatic pilot, forced Pfizer to stop the trial.

The Economist explains why the drugs industry may shares many of Pfzer's problems.

Fortune wonder if after the torcetrapib failure it is a good idea to outsource early stage drugs research and development .

Robert Stever at TheStreet.com sum up the long term revenue and earnings consequences of torcetrapib failure.

The Wall Street Journal reminds here that despite heavy losses suffered by investors and flat revenues expected by management for the next couple of years Pfizer still has hefty resources available. The recent cut of 20% of U.S. sale force will save $400 million a year. After receiving money from the sale of its consumer-products unit to Johnson & Johnson next month, Pfizer will have $34 billion (yes, billion with a "b") in cash. It may be enough to finance a successful turnaround.
The BreakingNews column , at the end of a gloomy article, point out that the company is expected to have a free cash flow after dividends of $10 billion next year.

Is the new Pfizer CEO nominated last July fitted to lead the turnaround ? Wall Street Journal has a positive column on him and list challenges which are facing the drug giant.
Jeffrey Kindler is an "inside outsider". He joined Pfizer in 2002 as general counsel and didn't have a previous experience in the pharma industry. He knows enough about the company to understand what need to be changed but he isn't "steeped in the company's and the industry's creaky traditions". Last but not least "until the stock goes up 50% from where it was when he took office (around $26) Mr. Kindler's stock options are worthless".

What should do investors with Pfizer stock ?

The Peridot Capitalist makes a strong case to hold on Pfizer . According to him it should be, at worst, a cash proxy yielding 4-5%. Any extra cost cutting efforts, positive surprise on remaining pipeline, smart acquisition or dividend boost can provide an attractive upside.
On the other side Marek Fuchs on TheStreet.com presents the bear case.

Investopedia explains how to evaluate drug makers .

Money Magazine provides three strategies for health care investing after the Pfizer flop.


And now an interesting value play.
Jim Clarke in an interview with Value Investor Insight suggest to have a look at Cavalier Homes (CAV). This manufactured house maker fetching $73 million market cap has a strong balance sheet. It still makes money in an industry at a 40-year low with only half of its plants operating. Downside is limited. If you apply to Cavalier Homes the multiple Warren Buffett paid for a competitor the stock has at least a 20% upside.


Vitaly Katsenelson relate a real life story which shows the similarities between successful gambling and successful investing.


Warren Buffett is in a great shape in this video of a speech to University of Florida students. Funny and insightful.

Value Investor Blog Weekly Reading List

Every week we will list columns, blog posts, mutual funds shareholder letters and research papers which can be of interest to value investors.
Feel free to send your own readings ideas using the blog comments.

Here is today the first issue today for the VIB Weekly Reading List for the week ending Dec. 3rd.

Investopedia column on Overcoming Compounding's Dark Side is a clear illustration backed by few simple examples of Warren Buffet famous quote: "The first rule is not to lose. The second rule is not to forget the first rule".

Jim Cramer explains how to be a contrarian . I'm not a big fan of his kind of "contrarianism" which is based almost exclusively on short term analyst earnings expectations. Though we are not brothers in our investing process we may somehow cousins after all.

Associated Press have a look at the stagnant paper industry . Sentiment is poor and Wall Street, as usual, discounts present poor prospects in the future. After stock market euphoria starting last summer this is one of the few industries where you may still find some interesting value or deep value candidates.

Bill Cara has an interesting comment on whole stock market valuation . We share his prudence though huge flow of private equity and leveraged buyout money together with a benign economic environment still provide some kind of support to stock market.

Nicholas Yulico, a reporter at TheStreet.com, writes a textbook of analysis of BJ's Wholesale Club (BJ) . It's a pitty that same has been published only about ten days after a 9% spike on the stock.
His insightful column demonstrates that it's a good idea to concentrate your research a bit more on balance sheet items and a little bit less on the cents and pennies per share on the quarterly earnings figures.
At VIB we believe that discovering under rated balance sheet items provides at the same time a margin of safety on your investments and above average returns.