Updating Some Recent Picks, Part 1

 | Jun 29, 2012 | 1:00 PM EDT
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As I complete my first quarter with TheStreet, I want to focus my next two articles on some subsequent business developments related to a number of my first-quarter recommendations.

In aggregate, while many of the business developments at a number of my recommended companies have been favorable, it has undeniably been a very difficult quarter for long-only stock picking. We continue to like our recommended securities despite choppy starts (along with the market), and in many respects we view recent choppiness as a good opportunity to build positions that should be successful in the intermediate term.

St. Jude Medical (STJ): Subsequent to our June 19 recommendation (in which I discussed the stock's selloff being driven by an adverse event filed with the Food and Drug Administration (FDA) for STJ's Durata IED lead), the company was able to analyze the lead and update the investment community.

The problem with the lead seems to have been caused by an external abrasion rather than the feared inside-out abrasion. In layman's terms, it means the reported problem can occur with any type of lead and was not a function of a St. Jude design flaw. In addition, the issue has no relation to the problem associated with the prior Riata lead (which was the market's worst fear). While the stock moved modestly higher on this disclosure, we believe it has not been appropriately revalued upward given that the worst case fears are unfounded. There should be more room for the stock to move higher.

MetLife (MET): The company did not pass its Fed stress test earlier this year -- it was subject to its oversight due to its banking unit. The company was and continues to be in the process of exiting this area of business, but FDIC clearance is still pending. Per the stress test requirements, MET is required to refile a capital plan with the Fed, even though a deal to exit its banking business is pending. The market's fear was that a refiled capital plan might entail costly additional capital raising, rather than the previously expected capital distributions, and this created a new level of uncertainty.

On June 19, MetLife management announced that the Fed had granted them a 90-day extension to re-submit their capital plan. We believe that this indicates that the Fed does expect that the company will be cleared to exit its banking business in the near term (the next month or two); therefore, it does not intend to burden MET with the requirement of resubmitting a capital plan (which in all likelihood would be moot).

This news is clearly a benefit to the company, and while the stock was penalized based on worst case fears, it hasn't gotten any credit for the removal of this risk factor.

Morgan Stanley (MS): As the quarter has unfolded, MS has been under great downside pressure driven by the European crisis and the fear that Moody's would downgrade the company's credit by three notches. A move like that would require the company to put up more collateral on a number of its trades. The market feared this could impair its economic model and might stress its balance sheet. On June 21, Moody's downgraded Morgan Stanley's credit ratings by only two notches. This was a nice bit of positive news.

And, while the stock had declined on worst case fears, it hasn't had any recovery on a better than feared outcome.

Although business conditions for investment banks and brokers have been difficult this past quarter, MS will be profitable, has a good business model, and sells for under half of book value. This difficult business environment should be short-lived, and we continue to believe that MS has more than 50% to 100% upside from current levels.

Teva Pharmaceutical (TEVA): We recommended TEVA earlier this week in the wake of the very favorable court ruling on Copaxone. The ruling brings an addition $5-$6 per share of earnings to the company for 2013 to 2015, yet the stock is only $1.13 higher than its closing price before the court ruling. As a win in this case was not at all a given, the market's muted reaction makes no sense to us. An additional kicker: TEVA will most likely be a winner in the Obamacare program, which was upheld yesterday by the Supreme Court. We consider TEVA to be attractive to buy right now.

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