August 10, 1995
Friday, August 10th we're closing out our holding of. . .
Merck & Co.
TYPE: Beating the Dow
Phone: (908) 594-4000
Closing prices, August 10th, 1995: Bid $50 1/2, Ask $50 5/8
Trailing 12-month revenues: $15.3 billion
Trailing 12-month EPS: $2.45
Last quarter reported: June, 1995 (2Q 1995)
Next quarter report date: About October 18th
Consensus EPS estimate for quarter: .70e vs. .62 last year
-------> TRADE: Selling our 165 shares
OK, as we mentioned about a week ago, we're going to close out our position in Merck on Friday. It's been a fantastic investment for The Fool Portfolio, up over 60% since our initial purchase last August. But as our longtime readers know, we use Beating the Dow for a portion of our portfolio, and the thing about Beating the Dow is that you often part ways with your Dow darlings a year later. That is the case with Merck, whose 165 shares we'll shed tomorrow.
UNDERSTANDING WHY. Why did Merck---a $15 billion company---have its market cap rise in value by more than 60% in JUST THE PAST YEAR ALONE? After all, one doesn't expect such weighty behemoths ever to double the return of the NASDAQ during a year of technology rallies. Lumbering giants can be expected to rise 10% a year, maybe, but 60% just seems extreme.
Ah, but that's what Beating the Dow is for. Michael O'Higgins's strategy has its adherents latching on to stocks that have been unreasonably persecuted by the market, arising out of dire feelings concerning negative pronouncements. In this case, the primary negative pronouncement was the stated intention of the Clinton administration to REFORM the healthcare industry. . . primarily by involving the government in regulating prices, guaranteeing health insurance to all, and running the system. Fortunately for us, for Merck---and, I believe, for the nation---the issue's executive-branch proponents were unable to garner sufficient majorities in Congress and sufficient interest among the national public to effect such a plan. And so Merck, which had been practically sliced in two the year leading up to our buy, slowly and dependably exploded. This was one young man who went not west, but NORTH.
There are other reasons. Earlier this year, the company announced a chicken pox drug which would effectively protect most of our children from ever getting the pox. Further, in the past month an FDA advisory panel gave its approval to Merck's Fosamax offering, a drug that treats osteoporosis more effectively than anything currently on the market. And earnings remained consistently OK throughout the year. In short, Merck did not want for good news from late 1994 to mid-1995. And Fools cashed in.
THANKS, MICHAEL. Thank you, Michael O'Higgins, for another wonderful year of using your strategy. This paragraph is dedicated to you. We credit you for this pick, and our other two Dow winners. It must feel somewhat strange for you to receive this credit, since your name---not your picks---are so ignored by the investment community at large. The Wise sometimes go right ahead and take your Beating the Dow picks and never mention in their newspaper and media interviews that they're using your strategy. I remember reading over Christmas in a national financial glossy about a money manager whose top picks were "Sears, Eastman Kodak, American Express, and Woolworth." This fellow's record was praised, relative to the rest of the fund managers portrayed next to him. Any Fool could see right through this: this was O'Higgins talking, not in name, but in investment approach.
You're a star here, Michael. And we look forward to another year of Beating the Dow.
TRADING STRATEGY. Dear reader, as with most Fool stocks, you don't need one. Dump Merck anytime you like. We're getting out tomorrow, to switch into some other Dow picks. If, on the other hand, you like your MRK shares, hold onto them. This is a great company, and a great stock. I personally expect it will probably beat the market over the next 12 months.
But we're greedy. . . so we're going to go for more. What say you, Chevron, GE, and Sears?!
---David Gardner, August 10th, 1995