Battleground - MRK

I have written several times that I prefer to stay away from “battleground” stocks. But I did not say that I NEVER invest in battleground stocks. Sometimes the stock is just gets too cheap, and the story in just too strong.

I think Pepsi - PEP - $130 - falls into that category, and now I am very close to thinking that Merck - MRK - $81, has become I battleground stock that I want to own. I want to see another quarter of data, so let’s wait for the June quarter to be announced.

I am thinking about MRK because I heard a very clear presentation from their CEO Rob Davis here:

https://event.webcasts.com/viewer/event.jsp?ei=1719375&tp_key=6138eb5b39

This is a presentation at the Bernstein conference that lays out the MRK strategy from a “80,000 foot” view of the industry and the company. There are so many complex issues, I really do not want to write about them all.

The easy route would be to focus on a $2 billion dollar company that is easy to understand. I seldom take the easy route.

The other part of the MRK story is that it has become the second largest holding of Barrow Hanley, and they added 20%+ to their position in the 1st quarter.

I have watched the holdings of the legendary John Neff since I became an owner of his Windsor Fund in 1982. I had a friend that worked in fixed income for Barrow Hanley, so I have followed their stocks, and the work of Jimmie Barrow, almost since their inception in 1979.

That does not mean that I always agree with everything they own. But on difficult stocks, I like to have a “sponsor” for the idea.

For a stock that is as simple as Gentex, I do not care that no significant value investor is a large owner. I know the the company and the industry, and I think I understand 80% of the important issues that influence the stock.

For a difficult stock like MRK I need help. I cannot even pronounce the names of most of their products. Only an almighty supreme being could understand all the issues surrounding healthcare at this unique moment in history. I really wanted to stay away from this mess. It would be easy to laugh at the complexity and move on.

For several years the largest holding of Barrow Hanley was the oil stock Hess Corp. - HES - $138. No other value guy owned HES. The geology of Hess’s big oil field in Guyana was unique, and the politics in this small nation were very confusing. Barrow Hanley stuck with the HES holding through many difficult news stories and were eventually rewarded with a big buyout from Chevron. If they can understand HES, I think they can understand MRK.

MRK is down from $120 to $80 in the last year. MRK now sells for only 9x a recently reduced 2025 estimate, and has a 4% yield. Interest coverage is 16x. I have clear strategy outlined by the CEO at recent conferences, and I have a sponsor at Barrow Hanley. What else could I want?

I know that I am walking into treacherous waters. I could buy Jack in the Box - JACK - $20 - at 4x PE, and with an 8% yield. Not only can I pronounce the names of their products, I can taste them.

I still want to own aggressive names like RXO, Brunswick, and Thor, but I want to balance them with some names not tied to the economy like MRK. The problem is those conservative companies right now are often battlegrounds.

I wish I could find a company selling at 9x and a 4% yield that has a monopoly on making rainbows and sunshine, but that company does not exist. American Water Works is a great company, with almost a guaranteed 6-8% growth rate, but I have to pay 25x and get a 2% dividend yield.

I do not want a portfolio of battlegrounds, but I can live with a few.

By the way Barrow Hanley’s 3rd largest holding is Keurig Dr Pepper - KDP - $33, which to to me is just Pepsi, with a coffee kicker. And their 4th largest holding is Carnival - CCL - $25, but I prefer Norwegian - NCLH - $20. Just for fun let’s mention Barrow Hanley also owns Halliburton.

And for even more fun let’s mention Barrow Hanley bought a homebuilder, Lennar - LEN - $115, for the first time. In the interest of full disclosure they also bought a Arizona/Nevada bank called Western Alliance Bancorp - WAL - $76. Hide the women and children.