The Prudent Investor


Purchase: Chattem, Inc.
June 27, 2007, 12:50 pm
Filed under: Healthcare, Update

When I make changes to the portfolio I will give an explanation of those changes here.

Today I purchased Chattem, Inc. (NASDAQ: CHTT).  As always when I make an initial purchase, I keep it to around $500, and in this case the purchase was 8 shares at $62 per share.  I do not think that this was a bargain, but that the company is currently fully priced.

This is the story of a little company that could.  Despite no dividend and a high P/E of 27, I believe that this company is going to do well over time.  As a matter of fact, this company was not chosen through valuation, which is the normal way I make my selections.  Indeed, when I look at the Debt/Equity of 3.5 and negative Quarterly Earnings Growth, I know that this is not a company anything like the other two selected for the portfolio.  That said, I am going to lay may case for the purchase and allow time to see if my thinking was correct.

The selections for this portfolio are intended to become long term positions, meaning that my plan is to hold them for at least five years.  By this I do not mean that I am storing the selections in the closet and hoping that five years from now I will have made wise investments.  It does, however, mean that my selections are not primarily driven by timing and the current state of affairs.  Although those can at times be good short term strategies, my intention is more long term oriented.  That said, if I feel the need to sell within five years then that will happen.

As far as diversification for this portfolio is concerned, I knew that somewhere in this long term strategy I would be selecting a health care company.  Baby boomers are now beginning to look at retirement, which means that the boomer bump in the age brackets is making an appearance in the older age groups.  With healthcare allowing us to live longer lives, there is just no way a long term portfolio can even consider not having at least a foot in this sector.

I hold two health care companies in my DRiP portfolio, Pfizer and Johnson & Johnson, which is an intentional overweighting.  The former has disappointed me, the latter has not.  Pfizer has had problems because of the lack of drugs in their pipeline, and this is the sort of thing that can be boom or bust to this type of company.  Johnson & Johnson has so many lines of business that they are considerably less dependant on drug development, and the takeaway from this was to select a company that was able to take other company’s successes and make them their own.  This led me almost in a straight line to Chattem, Inc.

Through its subsidiaries, Chattem, Inc. engages in the manufacture, sale, and marketing of a portfolio of over-the-counter healthcare products, toiletries, and dietary supplements. The company markets its products under various brand names in numerous categories, and you certainly have heard of many of them.  Examples are Icy Hot, Aspercreme, Gold Bond, Cortizone, Selsun Blue, Garlique cholesterol health supplements, Pamprin, and the list goes on and on. These are niche products that allow for high gross margins.

As one who is concerned about debt, I also understand that a good reason for acquiring debt is to capitalize on opportunity.  For instance, in order for Johnson & Johnson to obtain regulatory approval to purchase Pfizer’s consumer healthcare products division, they needed to sell a number of their brands.  A bit over $400 million later, Chattem became the owner of Act fluoride mouthwash, Balmex diaper-rash ointment, Cortizone anti-itch cream, Kaopectate diarrhea treatment and Unisom sleep aid.  They have taken over marketing and sales functions without any problems, and as production of these products comes in-house, profit margins should increase and earnings can be even more greatly generated through brand spinoffs.  They have successfully done this before, having purchased Selsun Blue from Abbott Labs in 2002.

If this company can continue to do what it has done in the past then this will be an excellent purchase, if not then it will share disappointment in my portfolio with Pfizer.  However, I do like to see companies build on successful histories and look forward to watching Chattem take advantage of future opportunities.  After all, none of us are getting any younger.



Portfolio Update
June 8, 2007, 12:52 pm
Filed under: Update

There aren’t many people reading this blog, so I am going to go ahead and end it – somewhat.  I think that instead of writing a couple fo times a week, I’ll make things very occasional, mostly updating the portfolio, which I will continue to maintain.

As for maintaining the portfolio, yesterday I purchased 1 share of CPO and 2 shares of SJW.  I will be following, for the most part, the InvestMete Strategy of determining where my purchase money goes.  Here is information about the InvestMete Strategy.  I invite everyone to stop over at the DRiP Investing Resource Center and join in the discussion there.

Cheers –

george