While the market continues to be driven by big picture macro considerations in the short-term, there have been a number of recent company-related activities that are worth noting, and, in at least one case, could merit action.
Here is a quick update:
Archer Daniels Midland (ADM): Two insiders used the stock's 2012 weakness to add to their positions in the company. In the past month the COO bought 3,875 shares at $25.74, and the CFO bought 4,000 shares at $24.53. While both investments are relatively modest, we give weight to buying from multiple top officers and think it is another positive data point which supports our bullish stock outlook for ADM in 2013.
Corning (GLW): Director Gordon Gund recently bought 170,000 shares at $10.76, a greater than 10% increase in his holding, bringing his total position to 1,856,160 shares. This comes on top of his 150,000 share purchase in March of this year at $12.75. In light of GLW's very depressed valuation (below book value, at 9 times 2012 earnings, a 3.2% dividend), and its favorable intermediate and long-term outlook, we believe that such insider buying could portend good things for the stock.
Vodaphone (VOD): Earnings and cash flow were in line due to strong Verizon Wireless operations, which offset a weak Europe. The regular dividend was raised by 7%, but the company will not be paying its special (extra) dividend from its VZ Wireless distribution as they did last year. Instead, they are using some of these proceeds to buy back stock. Overall, this is a modest disappointment, but we are still comfortable with the position since it sells at an attractive valuation and carries a 6% dividend.
MetLife (MET): About two weeks ago, some sell side analysts reported that the OCC had changed their website indicating that the upcoming review of MetLife's sale of its banking unit to General Electric (GE) would conclude by March 2013 rather than this December. This called into question the timing of the deal approval, which could then have negative ramifications, including MET having to file a new Stress Test for 2013; constraints on 2013 share buybacks; and limiting the upcoming dividend raise. Not surprisingly, the stock has been weak since then.
However, after speaking with the company, it appears that the OCC posting was made in error, and that they still plan on reviewing the sale of MET's bank to GE this year. While MET has been happy to discuss this with shareholders who have called in, there has been no public notice of this and we don't think this is widely known. If the deal is reviewed and approved in December as planned, we think it would give the stock an unexpected boost.
St. Jude Medical (STJ): Last Tuesday night the FDA posted its 483 inspection letters for two of STJ's manufacturing facilities. While STJ had given the Street a heads-up about some of this in their third quarter earnings call (and later posted a highly redacted version of the letter in an 8K filing), the full version had some very troubling details.
The focus of the FDA examination and issues related to the Durata lead. The most troubling issues related to documentation of product development, and to not following agreed-upon procedures in the verification of product safety. While STJ had agreed to test the product five times, they seem to be testing it only once prior to shipping.
While we continue to believe that the product is safe, last week's news calls into question the judgment of management. It also gives us a sense that the company seems to be mistakenly downplaying or misunderstanding the severity of the issues related to the FDA. It also raises the chances of some sort of punitive action by the agency in terms of a warning letter or worse.
Finally it puts a new and darker cloud over the company for a greater length of time. While Durata leads appear to be both safe and effective in their patient implants, (more than 250K have been implanted over the past six years), investors will have this overhang and will be waiting for another shoe to drop for the foreseeable future.
STJ has been a very disappointing holding and recommendation for us. And while we think the company will eventually get through this, we are no longer comfortable recommending it or holding it unless an investor has a very extended timeframe -- beyond two years -- and is willing to sit with a company replete with much higher than average headline risk and short-term downside.
We have been involved with St. Jude as an investment (off and on) since 1999. We have generally been supportive of management, but fear that the ultimate outcome of the Durata product could be far worse than management expects. The FDA filing last week and the company's response was the tipping point that changed our conviction.
For reasons stated above, we have sold our position.
As a postscript, there could be a positive wild card factor if the stock gets overly sold. It might then become a very attractive takeover candidate for the likes of JNJ or ABT. But in our view, at the moment, that's not enough reason to hold on.