Waiting is the hardest part
On the other end of the spectrum are cheap stocks that carry uncertainty regarding fundamentals. Value investors should give Hospira, Inc. (NYSE:HSP) consideration. The stock has languished for the last year and a half and sits roughly 50% below its 2010 high. The market leader in generic injectable drugs has been saddled with FDA scrutiny that has reduced capacity at one of its main plants and caused remediation costs that put huge dents in operating income. I was cautious on the company during all of 2012 and thought 2013 would bring favorable FDA news and improving earnings. Shortly after becoming bullish this year, the company reported that an inspection yielded negative results again. The stock tumbled on the news as this process will now push into 2014. Such is the risk when fishing for underperforming stocks.
The stock continues to have long-term appeal owing to their dominance in generic injectable drugs. This process is very complicated and probably gives the company a small economic moat. The complexity makes new competition less likely, but also can be a thorn when problems arise. Earnings have been hit by the large remediation costs, so it remains tough to value the company on such metrics. Eventually, these issues will be resolved, margins will return to favorable levels and the company can return to generating strong returns on invested capital.
HSP Return on Invested Capital data by YCharts
The EV/Sales ratio highlights the cheapness of the stock, but the question remains one of timing. Another setback later in the year would be a huge blow to the stock and could cause patient investors to finally throw in the towel. Alternatively, the market could surge 10-20% while Hospira meanders, waiting for an FDA ruling. This stock has long-term appeal, but isn’t without its near-term risk. Such is the investor’s dilemma.
HSP EV / Revenues TTM data by YCharts
The Foolish Bottom Line
Investing can be tricky at times and there’s no such thing as a sure thing. The investor’s dilemma usually separates value investors from momentum investors and both adhere to their own philosophies in an almost religious way. Riding a stock with a rising price and rising fundamentals can leave one holding the bag if results disappoint and shares plunge. Conversely, weak fundamentals can take longer to turn around than initially anticipated. Such a scenario is the so-called value trap and is an equally costly mistake. The key to constructing a winning portfolio is to include stocks from both investing camps. Thus, Marathon Petroleum Corp (NYSE:MPC) and Hospira make for great additions to a portfolio when added in combination.
The article Investor’s Dilemma originally appeared on Fool.com and is written by Justin Carley.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
