There's carnage all over the place now. But the special place in purgatory, the worst circle in hell, is in health care. Take the stocks of two companies that you may have never heard of but are total mainstays of what was once the most thriving industry in health care. Smaller companies involved in the making and selling of drugs, either proprietary or generics, have just been decimated.
Yesterday we saw a level of selling that pretty much took my breath away. The two worst of the day? Diplomat Pharmacy (DPLO) and Lannett Company (LCI) , two former high fliers that have come crashing down to earth in spectacular fashion, as yesterday seems like the big give-up after multiple days of give-ups.
Who owns stocks like these? What kinds of holders do they have? I had to ask myself that, because yesterday DPLO crashed 42% and LCI lost 26%. I wonder, what were the owners thinking? Could they have not seen this coming at all?
Consider these facts.
Diplomat is the nation's largest independent specialty pharmacy and its sales have been hurt badly by the softness in the Hepatitis C business.
Now, let's puzzle through this. I didn't know Diplomat until I hit it up when I saw it was down so much, and I know hindsight is distinctly 20-20, but seriously, if you owned this did you really think there wasn't pricing pressure in this part of the health care system after what the drubbed drug distributor, McKesson (MCK) , told you last week?
Did you not know that you were levered to Gilead's (GILD) Hep C drug, which has been under fire for months on end when, if you had done any homework, you would have known that the company had endlessly told you of its importance to its earnings? What the heck did you think you were levered to? Why would it shock you that there would be a shortfall here? This isn't exactly Action Alerts PLUS charity portfolio holding Walgreens (WBA) .
Or how about Lannett? Here's a company that makes generic drugs. Yesterday we learned that the Justice Department is looking into the pricing of generic drugs to see if there was collusion.
I don't know if there was collusion. That will be up to the judge and jury to decide if they ever bring indictments.
But I would suggest that this time the Justice Department would be going after the people who did the rigging, not the companies themselves, because of the subtle Arthur Andersen doctrine which says that the Justice Department shouldn't indict a company for some individuals' actions. The doctrine came about when Justice indicted that giant accounting firm for one of its office's work in Enron and thousands of people lost their jobs.
Under the Andersen doctrine, Lannett isn't about to go under, so if you knew about Gilead and you knew about the doctrine, you shouldn't be selling down 25% especially after the stock was down 32% going into the day, unless you were totally clueless.
Lannett did beat its earnings, but cut its sales forecasts; so you could expect it to go down even as it told you that it said the remaining quarters would be stronger than this one. Still, how could you not have been prepped for this? What kind of owner wasn't ready for this disappointment?
The important thing is to remember that those people who are bailing down here are now selling shares in a company that is selling at a little more than 5x earnings. That means either earnings are going to fall apart or, after this kind of selloff, you have a real bargain.
The problem is that this kind of share base -- not the company, but the share base -- is not worth dealing with. The share base is more of a problem than the company itself because the share base has done no homework and is continually surprised and each time it is surprised, it sells.
If that's the case, I would rather deal with the share base of Growth Seeker portfolio holding Amazon (AMZN) than of this one -- and that stock has a ridiculous PE and, with total up and down, a massive surprise factor.
Where am I going here?
Simple: these stocks and dozens like them in the health care sector seem to have no underpinnings whatsoever and have shareholders who have done no homework or are scared of their shadows or have no idea about how stock markets work. They are surprised by everything!
It's pretty darned insane.
In the end generics, specialty pharma, biotecs, big pharma, medical devices, health maintenance organizations and pharmacy benefit managers and contractors are all under fire. If you own them, how do you not know that?
We have one for Action Alerts PLUS, just one, Allergan (AGN) -- our only health care position, thinking that we have to have something and it is the cheapest of the big pharmas, and it doesn't matter. Not one bit. The darned thing goes down every day even as it is cheaper than Bristol (BMY) , Lilly (LLY) , Merck (MRK) , Glaxo (GSK) , Pfizer (PFE) , Astra-Zeneca (AZN) and Johnson & Johnson (JNJ) , and is a faster grower than all of them! Doesn't matter. It's getting killed.
This is a terrible group. If you don't love what you own, sell some. Buy it back later, lower. Don't just stand there like Bambi. Don't stand there, because the other people who own them can't be trusted. They will sell on a moment's notice.
It's painful to watch, it must be excruciating to have happen to you. I know that, because I am public, I have been pilloried about owning Allergan for the trust even as we have told people who read the bulletins it is going to $180 and we can't step aside and get back in because of our rules, which make us frozen pretty much every day and we aren't a hedge fund. We said $180 when it was at $230. We picked $180 because it will be at such a huge discount to the others that we have to put it away for the long term, even as it had to cut numbers because it chose not to raise price for non-core drugs.
All I can say is: I, at least, know what we own.
But, the big caveat: clearly others don't. And they, not Allergan, are the enemy.