Drug maker has the right Rx

Dear Mr. Berko: I know that you've always liked the drug companies because you always write positive articles about them and because your son is a doctor. So I'm reluctant to ask your opinion on Teva Pharmaceutical, which was recommended to me by my pharmacist. He says he just bought 140 shares of Teva and he gave me lots of sound reasons why I should buy it too. I won't ask my broker because he never says no to any of my ideas. Will you please put your objective hat on and tell me what you think of Teva? I would buy 300 shares. N.F., Columbus, Ohio

Dear N.F.: I used to be a drug company aficionado and believed these companies were mankind's savior and could do no wrong. Well, Jim Dandy and cotton candy, I was wrong as sin. I almost never watch television because most of the programs are like bubblegum for the brain. And for reasons I can't discuss now I volunteered to spend three hours a night, three nights a week for four weeks watching a 52-inch, high-definition television.

I was incredulous at the number of commercials devoted to hundreds of medical conditions that I never knew existed. And then it dawned on me that the drug companies were cleverly toilet training JQ Public into becoming hypochondriacs, then offering pills for myriad "ouches" that our parents either took for granted 40 or 50 years ago or prescribed themselves an aspirin for. Then I understood why the cost of a month's supply of drugs for many seniors exceeds the monthly payments on their homes. Big Pharma spends hundreds of millions of dollars designing those commercials then billions of dollars for TV time. Include the fancy-schmancy color packaging, and the price of those sweet little pills, which might be a dime a pop, zooms to $2 or $3 a swallow. That's turnpike thievery. Since this shrewd awakening, my respect for that industry has fallen below sea level.

However, TEVA Pharmaceutical Industries Ltd. (TEVA, about $42), based in Israel, might not be as evil as those big boys who use Madison Avenue to advertise their panacea of pills to the public. TEVA, which is in the process of acquiring Barr Pharmaceuticals Inc., will become the largest generic player in the world. This merger strengthens TEVA's U.S. presence as well as its presence in key markets across Europe. It also expands TEVA's pipeline to more than 500 drugs on the market and increases the number of generic drug applications waiting for FDA approval to more than 200.

Revenues of this generic drug company have grown from $1.8 billion in 2000 to an expected $11.3 billion in 2008. A lot of those billions derive from off-patent prescriptives, which a few years ago we bought from Big Pharma at astronomically higher prices. TEVA generates about 85 percent of revenues from North America and Europe. TEVA plans to double its revenues to $22 billion by entering the markets in Eastern Europe and Latin America in 2013. TEVA also plans to enter the Japanese market, which is the worlds' second largest generic market. This is excellent timing because the Japanese government wants to increase the use of generic drugs from 17 percent of the market to 30 percent by 2012.

Earnings this year are expected to come in at $2.70 a share and several of Wall Street's finest reckon TEVA will post earnings between $3 and $3.15 in 2009. TEVA has a good income statement with operating margins of 29 percent, cash flow per share of $3.65 and net profit margins of 20.1 percent. Darn, those are sweet numbers. On the balance-sheet side, long-term debt is just 18 percent of capital and there's no preferred stock outstanding.

I think TEVA is a strong buy at this level and in the coming four years I believe the shares could trade between $70 and $90 with a possible 2-for-1 split. This classy stock should sit well in any long-term growth portfolio.

Meanwhile, I think you have a pretty smart pharmacist. Ask him what other drug companies he likes and drop me a note.

Dear Mr. Berko: In January I bought 100 shares of Apple at $197 because I thought it might run to $300 and split. I thought its new products would take the world by storm and earnings would go sky high. I was right about everything except the price. The stock is now $107 and I'm out $9,000. So I'd like to know if you think I should buy another 100 shares at this price, which reduces my basis to $152 or if, perish the thought, you think I should take a loss? Please tell me your thinking on this stock. L.W., San Antonio, Texas

Dear L.W.: I like Apple (AAPL, about $99). I think AAPL has the best laptop on the market as well as other blockbuster products. That's not just my opinion but the opinion of the thousands and thousands of Apple owners and the thousands of new owners nationwide who have been buying those laptops, iPods and Smart phones like they were $20 gold pieces at half price. These products, plus Apple's new MacBook PC, portable digital music players, software plus overwhelming ancillary and peripheral products are light years ahead of the competition in the U.S. and outclass anything made in Japan by a thousand miles.

If revenues are any indication of the company's success, Apple aficionados are proud to tell you that revenues fourfold to $32.5 billion for the fiscal year ended Sept. 30 from $7.2 billion in 2004. While those scorching revenues put Dell and Hewlett Packard to shame, AAPL's earnings thundered from $1.36 a share in 2005 to $5.36 in 2008.

Heck, a lot of suits on Wall Street are telling us that 2009 revenues will go volcanic and explode by 20 percent while earnings will go ballistic. So, if you bebop into any Apple Store you just gotta believe those 2009 projections. The Apple stores, like the one here in Boca Raton, Fla., are so people-packed that a pickpocket could lift enough wallets in just a couple days to live like a king for five years.

Unfortunately the hoards in this Apple store are lookers and touchers, but not buyers. Unfortunately, even a highly skilled cutpurse would starve to death because those lookers and touchers, even in Boca Raton, couldn't make change for a $20 and their plastic is maxed to the hilt.

I suspect this scene is being repeated at Apple stores around the country. Layoffs across the nation are almost epidemic. Job losses in September were 121,000, October job losses exceeded 143,000 and the November numbers are expected to be higher again.

Almost every day the papers are reporting huge numbers: Merrill Lynch will lay off 10,000, Yahoo will be laying off 3,000, AT&T will be laying off 4,000, Northwest Airlines will lay off 10,000 and Delta plans to reduce its work force by 12,000. Fairly soon, thousands of Lehman Bros. and Bear Stearns people will stop receiving paychecks. It goes on and on, not just with big companies but also with small employers in small towns nationwide.

"So," I ask myself, "who will be left to purchase those Apple PCs that sell for twice or three times the cost of a Toshiba or a Hewlett Packard? And who will be left to buy those iPhones, iPods and other expensive playthings Americans use to distract themselves from the distaste of their daily reality?"

The answer is not encouraging.

While most on Wall Street think 2009 will be an Apple banner year. I think 2009 could be an Apple bummer year. Early this year some clever hedge funds and computer programs pushed Apple above $200 a share and you got sucked into the Apple euphoria.

There is no way in a sane universe that Apple was worth $200 a share in January. That's 40 times earnings. You've got to be dumber than a bag of hammers to pay $197 for a stock trading at that multiple. Didn't you learn anything from the tech bubble in 2000?

I think AAPL will lose its momentum, not tomorrow or next month but sometime this winter or fall. I know that Credit Suisse, UBS, Oppenheimer, JPM Securities, Merrill Lynch, RBC Capital Markets, Argus Research and Morgan Stanley believe AAPL has wings and can fly to the moon. However, I think even Steve Jobs believes that AAPL might have reached its peak.

So, if you check the Insider Sales Roster, you will note that a half-dozen officers and directors unloaded hundreds of thousands of shares between $140 and $160 in March and August. You should have followed suit. And even at this price I suggest you take a $9,000 loss.

Dear Mr. Berko: I think the housing market will recover in the next 12 months. For that reason, I would invest in 100 shares of Hovnanian Enterprises Inc., 100 shares of Lennar Corp. and 100 shares of D.R. Horton Inc. I would buy them because the economist for the National Association of Realtors recently told the public that the housing market is in the process of recovery and prices are in the process of rising. Please give me your thoughts on these issues. And if you have another stock in the housing market that you like better, I would like that recommendation too. H.W., Bend, Ore.

Dear H.W.: Never ask a barber if you need a haircut, a mechanic if your car needs a tune-up or a Realtor if he thinks home prices will move higher.

]Unfortunately, the National Association of Realtors is just as disingenuous as your congressman. The NAR's chief economist, Lawrence Yun has been telling NAR salespeople and the public that real estate prices have bottomed and should begin rising again in the very near future. Well, the NAR signs Yun's paycheck, and this is a tough time to be looking for a new job.

While I won't place all the onus on Yun, I am sorely disappointed that the NAR would act in such bad faith, misleading the public for corporate gain. The NAR, with 1.3 million members, seems to be influenced by the same greed that pushed Washington Mutual, Fannie Mae, Lehman Bros., Country Wide and Gold West Financial into ruin. What a shame.

How does the confused consumer know who to trust these days? He's lied to by his congressman, his preacher, banker, stockbroker, insurance agent, auto salesman, corporate CEOs, the president of the United States and hundreds of product advertisers. What a bloody shame.

Foreclosures have left nearly 5 million houses on the market. And that could get much worse before it gets better because rising unemployment translates to fewer potential buyers.

So, most economists are predicting another 15 percent to 25 percent drop in home prices nationally over the next 12 months.

I don't buy the common tommyrot that mortgage loans are not available. Loans are available if you have good credit, a 10 percent down payment and a secure job. And every bank has a right to demand those criteria if they want to make a secure loan.

However, prices will continue to decline until they reach a point at which the average wage earner can afford to make payment of principal, interest, taxes, insurance and maintenance. American families with a national medium income of $47,000 a year, or $3,500 a month after taxes, are priced out of the housing market. Few families can afford the average $1,700 monthly payments on a $203,000 home loan after the required $22,000 downstroke.

Because home prices have risen exponentially faster than income, there are four criteria necessary if the housing market is to recover in the next 12 months:

1. A 25 percent increase in the median income.

2. A 25 percent decline in home prices.

3. A decrease in the unemployment rate by 30 percent, to 4.5 percent from 6.5 percent.

4. And, failing those three, we would need a miracle.

So I think your interest in D.R. Horton Inc. (DHI, about $7.30) - which owns 170,000 lots, a six-year supply - is terribly premature. If home and land prices continue to deteriorate, DHI's losses could force the company to liquidate assets significantly below costs and implode its balance sheet.

Hovnanian Enterprises Inc. (HOV, about $4.10) is a highly leveraged company with debt and preferred stock representing 81 percent of capital. HOV will soon have a negative book value and has suspended the interest on its preferred stock. Stay far away.

Lennar Corp. (LEN, about $6.95) continues to watch its fundamentals erode. The company's exposure to joint ventures with other builders has created some off-balance-sheet liabilities that are too difficult to measure. This issue makes my tongue itch.

However, I'd be a buyer of Home Depot (HD, about $20), the $72 billion revenue chain of home improvement warehouse stores. HD, after falling from $44 in 2006 to $17 this year, might be in an enviable position to profit from the massive "spruce-up" of the nearly 5 million homes under foreclosure.

Wall Street reckons HD will earn $1.76 in 2008, which is a realistic 13 times earnings. The Street also believes that HD can earn $1.95 in 2009. And because the Home Depot board of directors got rid of CEO Robert Nardelli and his dedicated sycophants, HD seems to have regained most of its past esprit-de-corp and momentum. Store employees now smile and seem to enjoy their jobs.

So forget those home builders. I think a year from now you'll be happy as a monk in mud if you buy Home Depot.

Address financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.