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Friday Mailbag: Biotech, Disney, Virtual Reality… and More

By John Persinos on February 17, 2017

Most of the emails that I get from readers are concise, which makes for clearer, more effective communication. Perhaps that’s why it takes more time and effort to write tight copy.

In a letter to a friend, Mark Twain put it best: “I didn’t have time to write a short letter, so I wrote a long one instead.”

In the spirit of concision, let’s dive right into this week’s letters.

The DoJ will be MIA…

“Teva has gotten hammered over the past 12 months, although it’s starting to bounce back. Why has the market punished this excellent company? And should I stick with the stock?” — James C.

It’s true, investors have been unkind to Teva Pharmaceutical Industries (NYSE: TEVA). The stock has plummeted 37.2% over the past 12 months, largely because Teva and other generic drug makers drew scrutiny from anti-trust officials under the Obama administration for alleged price fixing. But with a new pro-business administration in the White House, drug companies probably have little to fear from the Department of Justice.

Israel-based Teva is the world’s biggest manufacturer and marketer of generic drugs. Generic drug prescriptions are expected to increase from 88% of all prescriptions in 2015 to as much as 92% by 2020. With a market cap of $36.3 billion, Teva is a research-driven colossus that dominates this fast-growing market. The stock’s overwrought punishment due to temporary political concerns has set the stage for a big turnaround.

The small-cap prescription…

“Small caps seemed poised to take off this year. What’s your view?” — Robert A.

Many analysts contend that the bull market is overdue for a correction and the recovery is on course for a correction. However, certain tailwinds position small stocks as safer havens for investors.

Jim Pearce, chief investment strategist of our flagship publication Personal Finance, confirms that today’s conditions make small caps attractive. Jim also serves as director of portfolio strategy for Investing Daily. As he points out:

“I have recently added small-cap and international stocks to the PF Growth Portfolio to diversify away from U.S. large caps, and am focusing on companies that I believe will benefit from a pickup in M&A activity.”

Trump wants to lower the business tax rate to 15% from 35% for corporations and 39.6% for sole proprietorships and partnerships — that would be a big shot in the arm for the country’s entrepreneurs and innovators. The president also wants to make it easier for global giants to repatriate their overseas cash hoards. With that cash, big companies would seek fresh products and innovation by gobbling up small companies.

Trump’s protectionism, meanwhile, may hurt export-dependent large caps but won’t do much to harm the economy’s “small fry,” which on average derive about 80% of their sales domestically. Below, I pinpoint a promising small cap in the technology sector.

An overlooked tax deduction…

“Well, it’s that time of year. I’m doing my taxes and wondering how to handle reinvested dividends in my mutual fund.” — Deborah K.

For your sake, I’m glad you asked. Investors often overlook the potential of reinvested dividends to lower their taxes.

If you’re set up to have mutual fund dividends automatically plowed into buying more shares, don’t forget that each reinvestment boosts your tax basis in the fund. That, in turn, lowers the taxable capital gain (or increases the tax-saving loss) when you redeem shares.

Neglecting to factor reinvested dividends into your basis results in double taxation of the dividends, once in the year when they were paid to you and reinvested and afterwards when they’re included in the sales proceeds.

The Mouse will roar…

“Why hasn’t Disney stock performed better? It seems to be a great company.” — Gerald R.

Walt Disney (NYSE: DIS) stock struggled in 2016, gaining only 1.2% compared to roughly 10% for the S&P 500. But it’s now recovering. Year to date, DIS shares are up 6.2%, compared to 5% for the S&P 500.

The blame for the stock’s under-performance last year lies with ESPN, the company’s sports network, which continues to suffer growing cancellations.

The phenomenon, which afflicts all media companies, is called “cord cutting,” but these concerns are exaggerated. Walt’s Empire boasts plenty of strengths that offset its woes at ESPN. Notably, the company’s movie and theme park operations continue to drive growth.

Disney owns the rights to some of the most beloved films in cinematic history, constituting a portfolio of iconic intellectual property that will generate revenue for decades to come. The company pioneered color cartoons, feature-length cartoons, movies with humans interacting with animation … the list of creative landmarks goes on.

The company also gave the world the first theme park. And there’s plenty of momentum left in Disney’s theme park business, as the company’s massive new park in Shanghai, China draws big crowds.

Disney announced in January that Star Wars: The Last Jedi, also known as Episode VIII, is scheduled for release on movie screens everywhere on December 15, 2017. Buoyed by thriving theme parks and the lucrative Star Wars franchise, expect The Mouse to coming roaring back.

Visionary technology…

“Virtual reality is a hot investment area right now, but it seems to be dominated by mega-cap companies. Can you recommend a smaller player that has more room for growth?” — David L.

Virtual reality for business functions especially intrigues me. One of the most promising virtual-for-enterprise companies right now is small-cap Vuzix (NSDQ: VUZI).

With a market valuation of $118.3 million, Vuzix originally focused on defense work but in 2012 sold off that division to focus on commercial applications for its virtual reality products.

On February 13, the company announced that its M300 virtual reality smart glasses are now certified to ship into Europe, the U.S., Canada, Australia, India and New Zealand. The M300 delivers a hands-free digital world to improve workflows for industrial, medical, retail and other applications. The average analyst expectation calls for the company’s earnings to grow next year by 27.1% on a year-over-year basis.

Got any questions? Pop me an email: — John Persinos

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