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Pharmaceutical Time


With the market still very much under siege, buying growth stocks "at a reasonable price," as some advocate, is not nearly enough to protect and enhance a portfolio. What some pros advise now: Buy into growth companies endowed with defensive characteristics. Investment adviser Stephen Leeb recalls that survivors of past bear markets were defensive companies whose earning power stayed strong. So Leeb, editor of Personal Finance newsletter, advises taking refuge in drugmakers. Leeb's top choices: Quest Diagnostics (DGX), Elan (ELN), and Pfizer (PFE).

"Well-situated drug companies have the potential for long-range steady and rapid growth," says Leeb. And they are defensive in that, no matter how the economy turns, people will need health care.

Quest Diagnostics, which provides diagnostic testing for doctors, has fallen from 146 a share in December to 88 on Mar. 14. Elan, an Irish company based in Dublin that makes medicines for pain and neurological disorders, is down from 60 to 48. It has transformed itself from a drug delivery and research outfit into a fast-growing drugmaker. But investors still value Elan on its former self, observes Leeb. Pfizer hasn't suffered all that much: Though off its 52-week high of 49, the stock isn't far behind, currently at 39.

The growth rates of both Elan and Quest exceed their price-earnings ratios, a positive sign. Pfizer's growth rate of 21.5%, however, is below its p-e of 29. But, notes Leeb, the company's projected growth is much more predictable than most other drugmakers. It has become a nearly "unstoppable marketing juggernaut" now that it has Warner Lambert in the fold, says Leeb. Insurers have again become fashionable to own, with an industry consolidation raging. But Big Board-listed Penn Treaty American (PTA) has yet to get the Street's attention, although there are whispers that it may soon find itself in a buyout deal. It may be hard to believe, since the stock isn't behaving as if a deal is in the air. The shares, trading at 16, are off their 52-week high of 21. But some pros who have been accumulating shares note that Penn, with a market cap of only $131 million, would be a quick gulp for rivals such as AFLAC or New York Life Insurance. Penn is expected to earn $2.90 a share in 2001, up from an estimated $2.66 in 2000, figures Albert Rice of Merrill Lynch. The company, which provides long-term home-health-care insurance to people 65 and over, is controlled by Chairman Irving Levit, who owns 24%. Some pros surmise that, for family reasons, Levit may be ready to sell. Some institutions own big stakes, including Main Line Trust, with 12%; Goldman Sachs, with 9%; Bear Stearns Asset Management, nearly 8%; and Dimensional Fund Advisors, 7.8%. "We see a deal happening," says one investor, who figures the stock is worth 30 in a deal. Levit declined comment. Would you believe that haircuts and hair care in the U.S. generate $45 billion each year? No wonder Regis (RGIS), the world's largest owner and operator of hair salons, has been on a roll: Its stock has bucked the market, climbing from 10 on Apr. 25, 2000, to 15 on Mar. 14, 2001. Still the stock is trading at a modest p-e of 10. "It deserves a 15 multiple, or a price of about 25 a share," figures Gary Steiner of investment firm Awad Associates, which has been buying. Regis has been buying back its own shares, notes John Kartsonas of Standard & Poor's. The board has authorized the repurchase of 10% of shares outstanding.

Revenues hit $1.1 billion in the year ended June 30, 2000, up from $991 million in 1999. And earnings should rise to $1.32 a share in fiscal 2001 and to $1.53 in 2002, estimates Steiner. Regis' allure in the current fragile market environment is that it is recession-proof, says Steiner. And although it is the largest operator, with 5,600 owned or franchised salons catering to upscale men and women, Regis controls only 3% of the market. This modest share implies that there is a lot of room for growth, says Steiner.

Regis, he says, expects to do more acquisitions and open more salons. Since it is the only operator with material size, Regis has acquired salons on the cheap. Most of its salons are in shopping malls and in Wal-Mart stores. Earnings fell below estimates in 2000, which the company blamed on higher costs and bad weather. But Regis, which has had eight straight years of strong earnings growth prior to 2000, is now on its way back toward double-digit growth, predicts Steiner.


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