Global Guru Eyes Drug and Internet Plays

10/30/2013 10:00 am EST

Focus: GLOBAL

Vivian Lewis

Editor and Publisher, Global Investing

These two stocks recently issued reports that worried investors; nevertheless, Vivian Lewis, editor of Global Investing, still sees upside opportunity for both global companies.

Steve Halpern: We're here today with Vivian Lewis whose Global Investing advisory service has been among the top performing newsletters for over two decades. Thanks for joining us Vivian.

Vivian Lewis: Thank you for having me.

Steve Halpern: You're about as international as one could be. Before launching Global Investing, you spent 18 years in Europe as a financial journalist, you speak half a dozen languages, and you spend much of your time traveling the globe. How has this overall background informed your investing strategy?

Vivian Lewis: Well, I think that we tend to always take our own domestic ideas about value, and speculative, and growth, and the kind of real estate investment trusts we want to buy, overseas with us, and it's not that comparable.

Things are different. Even such a simple thing as, what the accounting standards show, what quarterly reports include, how they adjust earnings per share, is not the same from one country to the next, so you have to go native.

Steve Halpern: And even when you're traveling, you spend a lot of time speaking directly to money managers and CEOs around the globe. Does that help you generate your ideas?

Vivian Lewis: Yes, but I also have a team of reporters who are permanent foreign residents—although many of them are American—who also go around looking for ideas for me.

Steve Halpern: Now, one stock that you currently recommend is the British pharmaceutical giant GlaxoSmithKline (GSK), and the company just reported a disappointing quarter. Does that deter you from continuing to like the stock?

Vivian Lewis: Au contraire, as they say in French. I think it's a high-quality dividend stock raising its dividend, and the yield has been put up to 4.6% with the increase that was announced today.

Now that is the yield in sterling to the sterling price, because, in fact, the yield moves around, being denominated in Sterling, depending on what the exchange rate is with the US dollar, so, to try to leave that one out, I work out the yield in the foreign currency to the cost in the foreign currency, and going forward, that yield applies, even if the currency moves one way or another.

Steve Halpern: Are you comfortable with the fundamentals for the company looking ahead?

Vivian Lewis: I think they're wonderful. Its sales didn't rise much, 1% in—again the currency of the country—pound sterling, but much more in dollars. Its year-to-year net earnings fell in sterling, but actually rose on a per-share basis, because of factors that I think are very significant.

It, first of all, sold a bunch of so-called health drinks in India. That produced cash that went to the bottom line. It is in the process of restructuring its European operations which will save $1 billion pounds sterling per year, currently about 1.67 billion US dollars.

It moves its US retirees to a private health plan, saving $267 million pounds sterling, just in this quarter, or $431 million US dollars.

Although it's subsidizing their signup for Medicare. It takes a drug company like GlaxoSmithKline to play Medicare by its rules, and unfortunately, the main reason the stock went down has nothing to do with these overall numbers, most of which were well explained.

The main reason that the stock fell was because China—where all of 3.8% of GlaxoSmithKline's sales occur—had a sharp 61% of sales dropping in Q3 of this year, and the result is that everybody's focused on China, because that's the mood.

What happened there was that Glaxo was accused, by the Chinese cops, of bribing hospitals to order more of its drug products, and apparently that's how business is done in China. Doctors are underpaid, hospitals are broke, and bribing to sell more drugs is something that everybody does, not just Glaxo.

But Glaxo was the first one, and the Chinese are showing much fierceness, and other drug companies are involved too, but, so far, they're not as much a target.

And beyond the drug companies, it turns out that makers of baby milk powder bribe hospitals in China to have new mothers given their product rather than someone else's, and it's a real mess, which has very little to do with Glaxo.

Steve Halpern: Now another off-the-radar stock that you've been recommending is called Yandex (YNDX), which is a Dutch company that offers internet services in markets such as Russia and Turkey.

Vivian Lewis: It's a Dutch company and it's all over Eastern Europe, including, as you said, Turkey. It reported, what I thought were very good results; however, the problem was that its sales were up 40%, but its income only rose 28%, and that is obviously a sign that something has changed.

And it turns out that it has signed a deal with a competitor called Mail.ru (Mail, Russia), which will run its ads, but which wants a royalty for doing so, and we actually own Mail.ru indirectly, through Naspers (NPSNY) of South Africa.

But Yandex fell sharply today, because people are worried about what kind of deal it signed.

It also has another operation that was not included in its earnings this quarter, a sort of a PayPal clone for Russia, and all in all, this is not a stock for widows and orphans. Its high-risk, high-growth, and you have to kind of take the bad with the good.

Steve Halpern: So, in both the case of Glaxo and Yandex, the market's taking a temporarily negative view, but you're willing to take a longer term view and you see these as buying opportunities.

Vivian Lewis: Well, the market fell after hours when Glaxo reported yesterday, but so far today, it's actually up, which is a shame, because I'd love to find a way to buy it cheaper, and Yandex surprised me, because I didn't really think that this kind of a so-called slowdown represented any real risk to the company's future, but, who knows? This is Russia. It's the Wild East.

Steve Halpern: So, in terms of a long-term investor, you'd be willing for somebody to take positions in these?

Vivian Lewis: Yeah. Well, they're different kinds of stock. If you're a yield player, I would think you'd want to take a position in Glaxo, but you might want to use a limit order to avoid overpaying.

If you're a growth nutter, off you go, and seriously consider Yandex, which is, even if it's only growing by 33% year on year, it's still incredible.

Steve Halpern: Well, thank you very much for joining us. We appreciate your insights.

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