A Surprise Pick for the Best of 2008

01/08/2008 12:00 am EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says a stock that's underperformed for years may wind up at the top of the heap in 2008.

The stock that I think may put up the best performance in 2008 is Bristol-Myers Squibb (NYSE: BMY).

I know this may strike some of you as an odd choice, especially given the fairly mediocre performance these shares have turned in over the last several years. However, some of the uncertainty hanging over these shares has been lifted. The firm has won its patent suit with Apotex over its important Plavixmedication. Also, Bristol- Myers has finalized a civil settlement agreement with the US Department of Justice.

I [also] like that the firm is cutting costs as well as restructuring its operations. The company plans to reduce total headcount by approximately 10% by the end of 2010. Bristol-Myers recently announced the sale of its medical-imaging business. And Wall Street anticipates additional asset sales, possibly the company's wound-care supplies company, ConvaTec, and its Mead Johnson nutritional business. These moves would be consistent with the company's plan to become more of a player in the biopharma sector.

Two additional reasons Bristol-Myers may get some play in 2008 is that 1) health-care stocks traditionally perform well during rocky market periods; and 2) high dividend yielders usually provide a buffer during tough markets. Bristol-Myers Squibb's yield of 4.4% should prove attractive to investors who want defensive exposure with some income. And for investors who were concerned that the firm would be cutting the dividend, Bristol-Myers Squibb recently announced that it would [actually] be increasing the dividend by 11%-the first dividend increase since 2002. The new quarterly rate will be $0.31 per share.

One final reason to like the shares in 2008 is takeover potential. True, the lack of takeover activity coming from private equity shops does reduce the number of potential buyers of Bristol-Myers. And many health-care firms are having their own problems to deal with and aren't likely to take on others via an acquisition. Still, Bristol-Myers' name always comes up in a discussion of acquisition candidates in the health-care sector, and that takeover speculation should provide some support to the stock price.

To be sure, Bristol-Myers Squibb has shot itself in the foot several times over the last five years, so it is not easy being totally confident in a positive scenario for these shares in 2008. Nevertheless, I still see a move to the mid-$30s for these shares. Couple that with a 4% yield and investors could see 20% to 25% returns for the stock in 2008. (BMY closed above $26 Monday-Editor.)

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