If you're an investor, arguably the last thing you want or expect to see from any of the companies you own is a scandal or public relations nightmare. But let's face the facts: It happens from time to time.
Usually when a company or its management team is alleged of wrongdoing, it becomes a red flag for Wall Street and investors, and as you might expect, it tends to have a decisively negative impact on the share price of a stock in question. Sometimes these PR flubs turn into genuine nightmares for investors, while others tend to blow over and create excellent buying opportunities.
Put plainly, it's impossible to predict which side of the dial a PR scandal will land in (Dumpster fire or buying opportunity) with perfect accuracy. Nevertheless, I would suggest that three recent scandals present an intriguing buying opportunity for long-term investors with an open mind.
Teva Pharmaceutical Industries
The situation: Pretty much everything that can go wrong has gone wrong for Teva Pharmaceutical Industries (NYSE: TEVA), a developer of branded and generic drugs. In the company's second-quarter press release, it announced that it was lowering its full-year sales and profit guidance, cutting its dividend by 75%, and looking to sell off noncore assets to pare down $35 billion in debt, which is mostly tied to its recent acquisition of Actavis. Furthermore, its CEO and CFO left within the past few months following bribery charges, which the company settled in December. The icing on the cake? Lead brand-name drug Copaxone, a therapy responsible for nearly 20% of Teva's sales and a big portion of its profits, is set to face a slew of generic competition beginning in 2018.
Why it's a buy: There's no denying that Teva Pharmaceutical has a long road ahead if the company is going to turn its fortunes around, but it does have the tools in place to make it happen. For instance, if the company can successfully divest its Women's Health and European pain and oncology operating segments, funnel its operating cash flow toward debt reduction, and utilize the $1 billion in annual savings from cutting its dividend, it should be able to reduce debt by somewhere between $7 billion and $10 billion by the end of 2018, in my opinion.
Teva is also standing on the right side of a numbers game. As the leading manufacturer of generic drugs, it stands to benefit from an elderly population that could grow dramatically in the decades to come. Seniors require more prescription medicines than younger adults, thus volume can be a key to Teva's success. Though generic drug pricing isn't all that strong now, it should stabilize within the next year or two, which will again put the ball back into Teva's court.
Having recently inked a new CEO and valued at just five times forward earnings, Teva could be worth a shot for opportunistic investors.
The situation: Small-cap drug developer Insys Therapeutics (NASDAQ: INSY) has come under fire over its marketing of top-selling drug Subsys. Subsys, a synthetic opioid, was approved by the Food and Drug Administration (FDA) to treat breakthrough cancer pain, but various lawsuits and allegations suggest that management and/or the company's marketing team were focusing their efforts on pushing Subsys to physicians who commonly prescribe opioid medications. As a result, Subsys sales have been halved over the past two years, and the company has gone from steady quarterly profits to a per-share loss each quarter. The company could still face penalties if it's indeed found guilty of targeting off-label use of the drug.
Why it's a buy: While the Subsys situation has been a mess, Insys also introduced Syndros to market in August, a long-awaited oral dronabinol solution designed to treat chemotherapy-induced nausea and vomiting, as well as anorexia associated with AIDS. Syndros was actually approved by the FDA more than a year ago, but being a synthetic version of tetrahydrocannabinol, which you probably know best as THC, it needed to be scheduled by the Drug Enforcement Agency. Between that scheduling and receiving an OK from the FDA on its marketing label, Insys lost more than a year of shelf time.
Syndros is a drug that Wall Street believes could generate approximately $300 million in annual sales, which is roughly what Subsys was bringing in on an extrapolated basis at its peak. Assuming Insys receives some clarity on Subsys, takes its lumps, and stabilizes sales of the drug, it's not out of the question that it will be bringing in around $1 in full-year EPS by the end of the decade. We could be talking about a cash flow positive, single-digit P/E stock in just a few years, which is what makes Insys a potentially intriguing buy.
The situation: Perhaps no scandal is more consumer-facing, or foot-in-mouth for that matter, than Wells Fargo (NYSE: WFC). Roughly a year ago, the banking giant announced that it had uncovered more than 2 million accounts had been opened between 2011 and 2015 without customers' knowledge. Some of these accounts incurred fees and penalties as well. Last month, Wells Fargo had to eat crow once again when it announced that the number of fake accounts was closer to 3.5 million, not the 2.1 million it previously disclosed. Wells Fargo's management team has blamed unrealistic sales goals and pressure to cross-sell at branches for the creation of these fake accounts.
Why it's a buy: Despite taking its lumps, investors should be reminded that banking blunders are part of the industry, even if Wells Fargo's ranks among the worst. Let's not forget about the time that Bank of America (NYSE: BAC) wanted to charge its debit card users a monthly fee to use their cards or the more than $60 billion in regulatory settlements Bank of America paid as a result of its mortgage lending practices (and that of Countrywide Financial, which it acquired) during the Great Recession. Despite these major PR mistakes, B of A's issues have been put cleanly in the rearview mirror, and Wells Fargo will have a chance to do the same in time.
Investors should also take into account that Wells Fargo has been a top-notch bank for a long time. Even though it may not be in consumers' good graces at the moment, it avoided catastrophe during the Great Recession by staying away from risky derivative plays and focusing on the bread and butter of banking: loans and deposits. The company's most recent quarterly results showed a healthy return on assets of 1.21%, low net charge-offs, deposit and loan growth, and a well-capitalized balance sheet. Though there could be a short-term period of weaker growth stemming from the company's fake-account scandal, it's unlikely there will be a multiyear follow-through that adversely impacts its results. Therefore, opportunistic value and income seekers may want to give Wells Fargo a closer look.