April Showers

Below the shifting landscape that debates the notion as to whether tariffs are a negotiating ploy or the real deal, some pig farmers are now operating at a loss of thousands of dollars per week (futures markets have priced in tariffs) and soybean growers are considering whether to reduce their plantings to avoid the same fate.  Meanwhile the impact on our NAFTA partners is also being considered across the borders.  Canada can increase their soybean and pork sales to China but the net impact will still be negative to them considering the magnitude of trade volumes.  Mexico is expanding ties to China in an effort to mitigate the ‘Trump’ effect.  All the while, the administration has to be aware that China holds the ultimate ‘trump’ card in the debt held.  Some bearish views posit US interest rates could rise to 14% if China ceases their bond purchases.

With these headlines staring at us, it would be excusable to have missed some of the underlying news – one being in healthcare.  Two of my companies made the news this past week with possible or rumored deals; Shire (SHPG) and Humana (HUM).  Takeda’s interest in Shire has all the appearances of industry consolidation, Wal-Mart and Humana’s discussions are more along the lines of being one of the last gorillas.

In the comment thread (regarding GIS), Lily from The Rich Miser muses, ” I would think it makes sense to invest in some small niche food companies that are doing good and you believe in -assuming they’re publicly traded- in hopes that they would be bought by a larger one eventually, and one can make a nice profit!? Or buy the big one when it’s low and just leave it alone for a few years?“.  This was the strategy I used with bank stocks following the financial crisis.  The problem with this approach is identifying the right candidates or going broad – which is one reason my portfolio contains 204 companies.  From a pure M&A perspective, owning the acquired company prior to the rumor or announcement gets you the merger premium – which can be sizable.  But you better like the company as there is no guarantee in this strategy.

If the ‘last gorilla standing’ is a correct strategic assumption, ponder this with me.  CVS has a deal with Aetna and  Cigna with Express Scripts.  AmerisourceBergen and Walgreens talks failed even though WBA already owns about 26% of ABC.  Now Humana and Walmart are rumored to be talking.  Why?  Probably the Amazon effect.  AMZN is talking healthcare with BRK-A and JPM.  AMZN already holds licenses in some states for medical devices, perhaps a CAH/OMI merger is on the horizon since both like the device market?  Or one (or both) with AMZN?

Of course this is all speculation – but somewhat logical.  All I know for certain is there is ongoing disruption in this sector.

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7 thoughts on “April Showers

  1. Gosh. Lot’s to ponder here on a Sunday night SR. And, a reference to a comment on a post at DD. I like the fact that not much gets by you in this little world we travel together.

    I will walk the tight rope here. I will defend the DD comment. My friend Lily is right. Buy the niche brand and hope they get acquired at a premium. And you are right. It is just so difficult to do. If I was that good, I wouldn’t be wasting my time blogging. 🙂

    Unrelated, but related…204 companies in your portfolio? Like you, I love the extreme diversification. Unlike you, when I expanded my individual stock portfolio to 100 issues (excluding mutual funds) several years back, it was too many for me to handle. I have since methodically paired back to 72 and I feel more comfortable. For whatever that is worth.

    Anyway, your writing is always intriguing. Kind of like a fine wine that gets better as I read more and between the lines!

    Tom

    Liked by 1 person

    • Thanks for the kind words! I didn’t intend to imply any disagreement with Lily’s observation – only to amplify the difficulty. I was intrigued that of all the comments, only she illustrated that angle. Even when (in my case) you have favorable tailwinds with the theory there are execution issues. Perhaps a future post is warranted regarding my M&A adventures.

      Of my portfolio, I have my meat and potatoes and my dessert. 36 companies provide 80% of the dividends. The remainder (and M&A premiums) come from the others. Nowadays I have plenty of time on my hands – unlike before. I guess it’s kind of a hobby 🙂

      Here’s hoping the wine doesn’t spoil and become vinegar! 🙂

      Like

  2. I’m actually liking the Increase in Trump tweets. Haha, I’ve figured that the deficit is so large, that we could Chinese more than they can hurt us. They’ve been riding the “3rd world country bandwagon for so long, that they’ve benefit so much. Then make Western company turning over the intellectual property in the name of national security. One big one is IBM turning over Watson code.

    Now, it’d be alittle more pain, but seriously as, we can’t improve robotics and artificial intelligence if we don’t produce anything in the US. If we don’t produce, the children won’t be inspired to improve the process of manufacturing.

    We’ve turned middle class income earner to China. So, now we only have the gap, the ultra rich , Silicon Valley rich, service jobs, working class and people on government support, the gap is too large. This is dangerous.

    Now, I wouldn’t mind if another remarked pull back of 40%, stay in the work force a few extra years and be set for life. 🙂

    Liked by 1 person

    • I’ll take a slightly counter position to yours. Tariffs are ultimately a tax on the consumer of foreign goods. You can buy American to avoid the tax but your selection of goods may be reduced and prices would likely increase absorbing the delta (profiting the corporation). Selective tariffs, especially when dumping is an issue, are understandable. To up the ante because your opponent counter-punched is petty.

      Modern-day supply chains are built in support of free trade. These systems would require retooling to be equally effective. Then what of the thousands of jobs in the ports, freight forwarders, truckers, warehousing and rail yards? Paradoxically, one of my companies (ABB) has filed for an exemption. This Swiss company has a US production line that may be at risk due to a specialty steel imported from China that is not produced in the US. So American jobs at risk due to tariffs on China?

      The valid point I see is intellectual property which was being addressed – in conjunction with our allies – as part of the WTO process. But now since the US has linked this issue with tariffs the united front against China has been fractured to a degree. And I totally agree on the wage gap, though I think the tax law (not tariffs) exacerbated it.

      Appreciate the discussion! 🙂

      Like

  3. Other related jobs to imports like freight and shipyards, they’ll adjust. Businesses in America have always able to adapt to change. Instead of transporting good from the shipyard, they’ll transport good from small cities to their new destinations. No problem there, just logistics. People will move where the jobs are.

    My thing is America needs to be in the same position as we were in WW2, our economy was fine was we did businesses with everyone. That country now is called CHina. They produce everything and doing business with everyone including North Korea, Cuba, Syria, Nigeria (including the terorist Nigerian), IRAN. This is national security issue if it comes to the point where we don’t even produce American Flags in America, our troops uniforms, major parts for weapons, … they even stole the plans for our fighter jets. Either way, we need to change from consuming economy to producing/self efficient economy or china will have our neck.

    Liked by 1 person

    • Although I agree with some of your points, this is one area that reality collides with sentiment.. One example (of many): We are not self-sufficient in cobalt. In fact, without imports our proven reserves would be exhausted in two years. As a component of lithium batteries – unless you envision a world void of laptops, cellphones and EVs – there’s not a lot of current options. This article highlights China’s activity meaning our necks may already be theirs!
      https://www.investmentu.com/article/detail/58698/cobalt-prices-china-secret-trade-weapon#.Wsvhon8h3IU

      Liked by 1 person

      • I don’t think it’s too late to save America.
        I thought. I’ve read an article recently that Apple is locked in a long term, contract with the mining company although China has found a new elements that’s more stable to use in battery but less efficient.

        I’m not saying that we don’t import at all, but I’m saying if we bring back 30-50% of the imports to make it domestic product it’d be a lot brighter future than this glooming dooming days ahead.

        I visited a small town in Virginia where they have a paper mills, it’s super stinky. I’d say, yeah, let’s China have all the manufacturing burden, yet, they’ve found a way to shoot chemical in the cloud to force rain, to decrease smog. It’s the same ocean, so they keep dumping th trash into the pacific and yes, the world still surfer from their horrible practice, yet they benefit from the wealth. Now I’m not single out China, India, is too very nationalistic. Trying to pull the same stunt.

        2 years of high cost, maybe 5-7 years before the next wave of innovation. Better than the current situation where our economy is too weak.

        Liked by 1 person

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