Thursday, April 9, 2009
(Cont'd from above)...

Jim (cont'd):   

These companies have been the markets open wounds… sucking injuries that drain the life out of all other stocks… and then yesterday we heard that the Treasury Department is coming to the rescue… extending TARP to cover life insurers that are classified as Savings & Loans, or bank holding companies, because they made some little acquisitions… the stocks have all roared since the news… I don’t want to buy them… but we have to acknowledge that the life insurers are no longer toxic… they are no longer the poison that keeps the market from going higher… they are no longer, they no longer have to dump their portfolios either to raise cash… I can’t understand why everyone was so outraged about this news… I mean all day today, all day yesterday… they acted like it was horrible… horrible that we got this bailout because the companies don’t deserve to be saved… and I think to myself… deserved… haven’t the people seen Clint in “Unforgiven”… deserved has nothing to do with it… bad things, unjust thing happen at the bottom… they are necessary to keep things from falling apart.

I have been a relentless critic of the life insurers… I even took a second life insurance policy because I was so worried about one of the first, I am not going to reveal which one, it is just too cruel at this point… but they made a lot of terrible decisions with their investments… they offered a lot of products that they shouldn’t… but that doesn’t mean that I want them to fail… I mean letting them fail means threatening just about every annuity and life insurance policy out there… is that something that we want… is that in the national interest… I mean letting them take TARP money, on the other hand, means filling in one of the last black holes out there… and making the market a much friendlier place to do business, even though it actually helps some people that you don’t want to help… it is time to stop hating these companies… the main reason that we didn’t like them is that we were afraid that they would need to raise capital endlessly either because of their distressed overleveraged commercial real estate portfolios or because they sold too many bearable annuities that became much harder to pay out after the insurers had taken such big losses in the stock market… TARP solves that problem.

And I have to let these stocks out of the sell block… you just can’t dislike them as much as you did before… that would be insane… that would be ignoring the big change… but because I am huge fan of crime and punishment, especially punishment… as well as Cramer fave Russ Coldencuff… I have got two new stocks for the Sell Block… two stocks that I think you should wave goodbye to.

Patterson Companies Inc. (PDCO) and Henry Schein Inc. (HSIC)… the two largest players in the dental supply space… I think that owning anything with dental exposure right now would be like getting some work done by Olivia in “Marathon Man”… a real root canal, hold the Novocain and the laughing gas experience, pass the clove… anyway, why… because dentists are starting to tighten their belts… fewer people are going to the dentist… that is how you know the middle class must be in trouble… good teeth are the pillar of borshway identity… and more people are heading down, get this, to Mexico for cheap dental equipment… cheap dental treatment… I am not kidding… a wild consequence of high price dental work in America.

Now, Credit Suisse First Boston did a survey of 100 dentists, the results should make me think that I should spit PDCO and HSIC right now… more dentists are seeing a decline in backlog, more empty chair time, and around 51% of the dentists they talk to said that the economy was making them less likely to buy dental equipment… up from 32% 3 months ago… these two companies aren’t just getting hurt on equipment sales… they also have to deal with lower consumable sales… less dental activity means that dentists are buying less of the disposable… one shot of equipment they use for each individual patient that are more profitable for equipment suppliers.

Consumables make up 35% of Patterson’s revenues… and their numbers were flat… 30% of Schein’s revenues… they saw a slow down in consumable sales… never the less, because people thought that the economy was getting worse… the street is still bullish on both stocks… Patterson, 4 buys, 6 hold… HSIC, 4 buys, 4 holds, 1 sell… I think the analysts are afraid to down grade because the stocks are already down so much… PDCO is off 45% from 12 months ago… HSIC is down 29% same period… but you know what, I think the stocks can go still lower… so I am putting them in the sell block.

It gets worse… many less informed buyers think these are defensive stocks… and that this business from dentistry never suffers from down turns… so the stocks have been bid up, a little bit… because of the false sense of safety… when you combine this with the fact that safety has now gone out of favor, courtesy of the rotation into banks and industrials with the idea of earnings risk… you could get drilled owning PDCO or HSIC.

Here is the bottom line…

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