WASHINGTON, November 1, 2017 – As we indicated in our companion column today, we’ve been out of the box for the last several trading days due to some health issues which, we hope, are now on the mend. To get back on track today, we’ll highlight our anguish with Allergan (symbol: AGN), our hopes for an entrée into old favorite B and G Foods (BGS) and our ongoing sparring efforts with what’s lately been an ugly IPO market, at least for us.
While attempting to recuperate from some inner ear problems, we haven’t exactly been idle in our portfolios. In fact, we’ve been moving a lot of things around to compensate for the ongoing disaster involving our overly-large position in drug giant Allergan’s convertible preferred “A” shares (AGN/PRA, your brokerage’s symbol may vary).
Convertible preferreds are not just interest-rate sensitive. Their pricing is strongly linked to the shares of the underlying common stock, given that these convertibles are, in fact, convertible under various scenarios, into shares of the common.
In Allergan’s case, these shares are mandatorily convertible into the common on March 1, 2018. So if we don’t get out for a profit before then, we’ll have to let the conversion happen.
This wasn’t a bad prospect even just a couple of months ago. That was even a major reason behind our unnaturally big (for us) position in AGN/PRA. But, as we’ve often preached to the multitudes, even the most placid of stocks can run into headline risk, and that most certainly happened to our investment in Allergan’s preferred shares.
As most of our readers know by now, Allergan was stunned in October when a Federal judge scoffed at their novel patent defense for their highly effective and popular dry-eye treatment Restasis. In the process, the judge invalidated all the relevant patents for Restasis, meaning that generic competition could happen much earlier – in 2018 – than expected (2022-2024), robbing Allergan of a drug that accounts currently for roughly 10 percent of its profits.
That slaughtered the stock horrendously, first in September and then with a vengeance in October when the ruling was issue. As far as our preferred shares were concerned, they’d just hit an August peak of $906 per share. Now that the patent decision is out, however, we find them today at a sickening $668 per share, after falling even lower to $621 per share, a price which, we hope, marks the bottom of this swan dive.
That $621 market amounts to roughly a 30+ percent loss in a short period of time, which is devastating. But the stock has recovered somewhat today. It’s currently up an impressive $30.94 per share from Tuesday’s $641 close, hard on the heels of a huge improvement in profitability for the previous quarter just reported by the parent company.
Sadly, but prudently, company management has prudently decided to take an early and heavy write-down on Restasis in the current quarter, transforming that bit profit number into an accounting loss. But this should enable the company to get back ahead of the curb as its 50-50 odds appeal of the current ruling runs its course. The write-down is based, realistically, on the entry of a generic competitor to Restasis in H1-2018.
We reluctantly pared back our position in AGN/PRA last week for a loss for the sake of retaining capital. Over time, even if we allow the shares to convert, we figure we’ll come out on top by holding the common shares of this otherwise find-performing pharmaceutical giant. But near term, this holding continues to make our 2017 numbers look pretty sick as we move through the final quarter of the year.
On other fronts, one of our favorite Consumer Staples stocks, B and G Foods (BGS) is up sharply today, gaining $4 per share as we write this at 1:45 p.m. ET, to stand at $35.85 per share. The stock has been suffering for the better part of a year, based on a highly unlucky 2016 transition after its huge acquisition (from previous owner General Mills) of the plants and frozen vegetable brands offered under the venerable Green Giant label.
To make a long story short, for various reasons, B and G found itself fatally short of Green Giant product last fall to the point where the label actually disappeared for a time from grocers’ shelves. B&G shares took a massive hit along with a relentless series of ratings downgrades, consigning the stock to the doghouse for the better part of this year.
But B and G remains an expert in acquiring, rescuing and re-marketing once marquee but now almost forgotten brands that range from Ac’cent MSG flavor enhancer to the Cream of Wheat line of hot breakfast cereals to the Emeril’s line of seasonings.
That said, the crash of Green Giant right after B and G acquired the brand and manufacturing plants was a real near term disaster. That disaster seems to be receding. Lately, we’ve been seeing this once-dominant brand starting to reappear in grocer shelves, although regaining the shelf space they lost will likely remain a struggle.
On a positive note, B and G is transforming Green Giant by offering its once popular products like frozen broccoli in light sauces but augmenting them with innovative new products like vegetable tots and cauliflower tots, a more healthful alternative to those eternally popular Tater Tots.
Curious about these new products, we’ve recently tried both the broccoli-oriented veggie tots and the cauliflower tots, and have particularly found the latter to be quite tasty. We hear that the next innovative products on tap will be curly sliced veggies that can be used as pasta substitutes. That, too, is an interesting development and typical of the way B and G innovates to revive the nearly forgotten traditional brands it tends to acquire.
Given that even at its current price, B and G pays an outsized dividend of 5 percent-plus, we’re hoping the stock will drop back a bit after today’s surge so we can add it back into our portfolio where it’s been absent since somewhat before last fall’s Green Giant disasters. The huge addition of this once popular brand, plus its outsized profit potential as B and G breaks new product ground in the frozen veggie sector could promise excellent returns in FY 2018.
We hate to make our articles too long, as we know our Internet readers only have so much patience for verbiage, so we’ll sign off now with just one more piece of info.
After a pair of disastrous (for us) recent IPO issues, we may try again tonight for some IPO shares in Funko, Inc., (proposed symbol: FNKO) a rather strange company that makes its money on pop culture products (bobbleheads, etc.) based on popular entertainment and cartoon characters.
The offering itself, like a number of other offerings this fall, is actually skewed against the average stockholder, this time by the existence of a bewildering array of related shares and ownerships that guarantee the little guy will have little if any voice in the company’s affairs going forward.
We hate these complicated structurings, as they’re guaranteed to keep common shareholders out of the importance loop. But we may nibble on this one after it prices tonight, confident that if there’s any demand whatsoever, we won’t get any shares.
But we’ll complain more about this in a successive column as we’re out of space and time right now.
Have a good one.