Shares of Baxalta closed for $31.71 the first day (July 6th, 2015) after they were recommended.
Here’s what the July 5th the newsletter had to say about Baxalta:
“Baxalta’s high expected total returns and competitive advantage should give the company a P/E ratio above the S&P 500’s. Fortunately for shareholders, Baxalta’s P/E ratio is still low at around 13.3. The company’s P/E ratio is being suppressed due to selling from the recent spin-off. Now is an excellent time to buy into this high quality pharmaceutical business, while the P/E ratio is still low.”
Today, Baxalta stock is trading for ~$40 per share. Baxalta investors who purchased at the closing price on July 6th, 2015 are sitting on 27% total returns (including dividends).
For comparison, the S&P 500 is down ~8% over the same time period.
Baxalta’s stock started trading at the end of June, but only four funds from the Insider Monkey database reported long positions in the company as of the end of the second quarter. However, at the end of September, the number of investors bullish on the stock amounted to 39 and together they held around 3.40% of the company’s outstanding stock. Among the funds long Baxalta are Richard Pzena’s Pzena Investment Management, David Shaw’s D. E. Shaw, and Ric Dillon’s Diamond Hill Capital.
The Shire Acquisition Drama
Repeated acquisition attempts by Shire PLC (ADR) (NASDAQ:SHPG) has repeatedly attempted to acquire Baxalta.
On August 4th, 2015 Shire offered to acquire Baxalta for ~$45 per share. The announcement caused shares of Baxalta to rise from around $33 per share to around $37 per share.
Baxalta’s management quickly rejected the offer. The company’s press release said the following:
“During our meeting this week, the Board unanimously concluded that it is not prepared to engage with Shire in a discussion about a combination of our companies based on the value you indicated in your proposal”
“A transaction at the exchange ratio you proposed significantly understates Baxalta’s true value.”
Our board is mindful of its fiduciary obligations to Baxalta’s shareholders, and we are confident in our standalone plan and our ability to generate significant shareholder value based on that plan. Baxalta’s platform is well positioned to generate substantial value for our shareholders and proceeding with a transaction at this time presents a significant and real risk to that value creation. Our Board has evaluated your proposal in this context and concluded that it is not a basis for further discussions.”
Clearly Baxalta’s management thought the company was worth more than $45 per share… Or did they?
Baxalta Mangement Was Just Posturing
As it turns out, Baxalta Inc (NYSE:BXLT)’s management was merely posturing. On January 11th, Baxalta’s management accepted an acquisition offer from Shire.
The price… ~$45 per share (when the deal was struck).
Shareholders of Baxalta will receive $18.00 in cash and 0.1482 shares of Shire PLC (ADR) (NASDAQ:SHPG).
At current shire prices, this comes to a value of $44.31 per share. Baxalta stock is currently trading for around $40 per share.
Why Now Is The Time To Sell Baxalta
Investing in a security for just ~7 months (from July 2015 through January 2016) is not a long-term investment; short-term trading profits are not the goal of the Sure Dividend approach.
Baxalta Inc (NYSE:BXLT) stock is no longer a dividend growth investment because of the announced Shire acquisition.
Baxalta is now a merger arbitrage play.
Investors focusing on a dividend growth strategy should stick to dividend growth stocks. Since Baxalta no longer fits that definition, it should be sold.
Chubb and now Baxalta are the only two stocks that have been recommended as sells using The 8 Rules of Dividend Investing.
The sell rules in The 8 Rules of Dividend Investing are:
- Sell if a stock becomes wildly overvalue (quantified as a P/E ratio > 40)
- Sell if a stock cuts or eliminates its dividend payments
Aside from these 2 rules, sells also occur due to special situations (like acquisitions).