Roy Ward: Top Picks Update

07/21/2014 10:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Each January, we ask the nation’s top newsletter advisors for their favorite stocks for the new year. Now that we have reached mid-year, we are following up with some advisors whose performance was most noteworthy. Here, we speak with Roy Ward, editor of Cabot Benjamin Graham Value Investor.

Steven Halpern:  Our guest today is Value Investor Roy Ward, editor of Cabot, Benjamin, Graham Value Investor.  How are you doing today, Roy?

Roy Ward:  I’m fine thanks Steven, how are you?

Steven Halpern:  Very good.  At the start of 2014, you selected Questcor (QCOR) as your favorite stock idea for the new year.  Since then, the shares are up a remarkable 70% plus.  Could you give us some background on the company and your original rationale for selecting the company?

Roy Ward:  Sure.  Questcor Pharmaceuticals is a pharmaceutical company and they rely principally on one product that they have and it’s called Acthar.  Acthar is used in the treatment of multiple sclerosis and a variety of other problems.  The company has—all along—has received FDA approval to use Acthar for other health issues but they still are principally a one-product company. 

Back in December or January when I recommended Questcor it was around 52 and I felt like it was a bargain at 11 times current earnings.  They had a PEG ratio, which is the current PE divided by forecast five year earnings per share growth. 

PEG issued a 0.37 which is extremely low and it paid a good dividend yielding 2.3%.  The balance sheet was strong with minimal debt so I thought it was a bargain for a company growing about 50% per year in earnings. 

Steven Halpern:  The stock has done remarkable since that original recommendation.  What accounts for that?

Roy Ward:  A lot of it—well, there are a couple of factors.  One is the sales and earnings keep exceeding expectations.  They’re still growing at least a 50% rate which is very attractive. 

The second factor is Mallinckrodt Pharmaceutical—which is based in Dublin, Ireland—with the symbol (MNK) on the New York Stock Exchange decided they wanted to buy out Questcor. 

They recognized that the price was extremely fair and offered nine-tenths of a share of Mallinckrodt plus $30 in cash to the shareholders of Questcor and that was a 27% premium at the time so Questcor’s share price shot way up. 

Mallinckrodt is doing quite well and their share price has increased since the practice was announced in April, so that both stocks have increased in price. 

The deal was due to close by the end of September and right now—with Mallinckrodt’s current price—the deal is worth $98.50 to Questcor shareholders and the stock is now about $92.5 so there’s still about a $6 upside.

But I feel that Mallinckrodt is growing a lot slower than Questcor and with this 70% I’ve advised holders to sell their stock at this time.  The extra $6, I don’t think, is worth waiting for.  There are a couple of investigations on the horizon which could cause problems too.

Steven Halpern:  Okay, so looking out toward year-end is there a new recommendation that you would suggest for investors?


Roy Ward:  Yes, I would suggest selling Questcor and buying Noble Corp. (NE) as a complete switch.  Noble is in the oil drilling business, entirely off shore drilling and they’re growing quite nicely. 

Even though other oil drillers have run into some problems during the first half of 2014 because of some over capacity out there and the demand has been stagnant for oil drilling but Noble—despite that—has increased their sales and earnings nicely during the first half of the year and that should improve a little bit more during the second half of 2014 going into 2015. 

The stock sells at a real reasonable price, it’s 8.7 times current earnings with a nice dividend yield of 4.6%, price to book value ratio is under one and the price to cash flow ratio is less than four.  Balance sheet is good and I think the stock has potential to reach—let me double check that—reach about 62 or double during the next one to two years. 

The other kicker to the stock besides performance doing very well—as far as sales and earnings—is they’re going to spin off half of their company into a company called Paragon Offshore.

I think that the shareholders of Noble will receive Paragon shares before the end of September and I think some of the parts or some of the two companies will exceed the current price for Noble by quite a bit. 

I think there are a couple of things going for Noble right now and that doesn’t even take into consideration the fact that Noble is adding rigs.

They’ve added five new rigs during the first six months of 2014 and they’re due to add a couple more during the current quarter and that’ll boost capacity, and also, the rates that they’re contracted for are premium rates so that the profit margin should be excellent on those new rigs. 

The company has a lot going for it and the price has remained real low and I think it’s a buying opportunity—if you will—at the current price, which is about $31.81 as we speak. 

Steven Halpern:  We really appreciate you taking the time, thank you for your update on Questcor and we really appreciate you sharing a new investment idea.  Thank you very much.

Roy Ward:  You’re very welcome.

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