I am back

If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?

I am slow in new posts recently because I am planning a major life change event. Now, the dust has settled, I would like to catch up. First, I would like to talk in details on the GSK purchase I mentioned in my last post. Here is a speech I gave in a local toastmaster club.

There are bulls and bears in the market making noise on the mass media daily. While the large audience ruminates over deficit, interest rate and unemployment, a lot of abnormalities are ignored. With abnormality opportunity comes along. Coach versus GSK exemplified this abnormality.

I had a history with both. I have been owning GSK since 2006 and most recently added my position in February 2010. GSK is a global healthcare company selling products from toothpaste to vaccine. If you watch news, you can't escape the bombast of its ads. I have been owning Coach since 2008. It is a popular handbag brand for ladies. I most recently trimmed my position.

While people must brush their teeth and take their pills every day, it is always a mystery to me how many handbags a lady needs. Right now, there are only two types of vaccine for cervical cancer. On the other hand, there are more than 10 handbag brands selling at higher price point than Coach, more than 10 brands selling at lower price point and more than 10 brands selling at the price point.

Both GSK and Coach are highly profitable. They have similar net margins: GSK is 19.5% and Coach is 20%. While GSK spends heavily on R&D, Coach pays lavishly for its creative staff.

Coach's balance sheet is excellent. It can easily pay off its liability using its cash. GSK's balance sheet is not pristine but decent. It has global reach, diversified businesses and regulatory protection.

Coach is expected to grow fast. It is said that it has great potential in China and other emerging market. GSK is facing regulatory headwind. Its asthma treatment drug is under scrutiny, the new healthcare regime is trying to cut drug price and FDA is dragging its feet approving new drugs. But as senior citizen becomes larger and larger share of the population, the healthcare industry and GSK will keep growing.

Here comes the abnormality. GSK is selling for a p/e ratio of 11 yielding 5%. Coach is selling for a p/e ratio of 21 yielding about just a hair over 1%. And most analysts on the street call GSK a "HOLD" and Coach a "Strong Buy". Even after substracting the cash on Coach's balance sheet, it is selling for a p/e ratio of 18.27.

Let's summarize the case. Coach has one focused product line, faces more competition, selling almost twice as rich as GSK. GSK is paying out more cash, providing essential products and expanding in emerging market. As long as the abnormality exists, I will keep exploiting the opportunity by adding GSK and trimming Coach.