A Good Weekend for Bargain Hunting

Last week was a rough week for the major stock market averages. Oil was down, leading to a rout for oil stocks, inflation fears are up, leading to rout for a lot of other stocks. Read that sentence three times, see if it makes sense to you, price of oil down, inflation fears up, huh.

This weekend I am doing two things, studying for the December CFA exam, and looking for good opportunities in beaten up stocks. If anyone has an idea they are considering, post it in the comments.

Right now I'm focusing on an company I have liked for a while, Merck. Merck has a lot of things going wrong for it, including concerns about upcoming patent expirations for major drugs, and huge litigation risks stemming from Vioxx. Late Friday news came out that a judge had tossed out the testimony of one of Merck's key witnesses in one of the patient lawsuits. The stock dropped $.98, that's 3.65%, a loss of about $2.2 billion for Merck shareholders. The stock came back up $.25 in after hours trading, reducing the loss to $1.62 billion.

Merck is going to lose a lot of money on these lawsuits, most likely something like $30 billion in total, but when one ruling (which Merck will appeal) causes a 3.65% drop on top of the huge moves down over the past couple of months as the litigation liability became better defined, it means a lot of people feel really nervous about this stock.

This weekend I am going to do a bit of research and modeling, because right now I think Merck stock may be a really good investment despite all the bad news.


Timothy Burger
timothyb(at)timothyburger.com

Rational?

Forbes reports that according to work done by Sendhil Mullainathan at Harvard, consumers may be much less rational than traditional economics would suggest:

"It turned out that having a wholesome, happy female picture in a corner of the (loan solicitation) letter had as much positive impact on the response rate as dropping the interest rate by four percentage points. Says Eldar Shafir, professor of psychology and public affairs at Princeton and a coauthor of the study: "I didn't know that, nobody expected that."

The degree to which investors make rational decisions is a central issue in behavioral economics and important to making good investment decisions. These results are surprising, but not that surprising, makes me wonder if John Bogle has ever bought something from a pretty face.

Timothy Burger
timothyb(at)timothyburger.com

Refco

The KU Applied Portfolio Management class has just done some good work on Refco. Refco is one of the biggest futures dealers in the world.

You can read more about Refco, as well as other research from KU APM here

Timothy Burger
timothyb(at)timothyburger.com