Here’s the second question in our value investing Q&A series. Please send us any comments or questions.
Question: I have owned Transocean (RIG), for a while, and while I know it is a very volatile stock (why, I don’t know), when do you expect it to get over the $200 mark? I don’t see what’s holding it back.
P.S. How can you want to own both WAG and CVS? They’re competitors! That sounds like you’re playing one against the other.
Answer: Thank you for your email regarding Transocean (RIG), Walgreen (WAG) and CVS Caremark (CVS). Sales and earnings at RIG are growing rapidly. The drop in oil prices caused the stock’s price decline from a high of over 160 to the recent 115. Oil drilling companies are not as affected by oil prices as producers and refiners, but the stock prices of drillers seem to always follow oil prices anyway. I expect stock valuations of drillers to remain relatively low in the future because of the uncertainty of whether oil will continue to provide most of the world’s energy needs in the future. But you are right; RIG should be selling at 200 rather than near 115, where it has been lately.
I switch my recommendations of stocks within an industry sector quite often. I base my decisions for the Model stocks on which stock in a sector is more undervalued and/or has the brighter outlook. Currently, I believe CVS has a better outlook because of an aggressive acquisition program that has produced excellent results during the past several years. In that regard, the companies are quite different, because WAG has chosen to grow from within.
2 responses so far ↓
1 flyboy // Sep 16, 2008 at 4:48 pm
Yesterday BAC agreed to buy Merrill for 29 per share. Today Merrill is selling for 17. Huh? How can this be? Why shouldn’t I buy a wagon full of Merrill and sell it to BAC? I know there is something wrong with this picture, but what is it?
2 Mike Cintolo // Sep 17, 2008 at 12:12 pm
Flyboy–on the face of it, you’re right, MER should be trading much higher. However, we’ve learned to respect the market’s opinion … and the market seems to be saying that the deal may not go through as it was written up, for whatever reason. (Something like this happened with CLF and ANR earlier this year.)
I’m not saying it definitely won’t get done, but I’d rather not play it (at least in a big way).
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