Taro: The black sheep
Nothing good will come of Taro until the management is changed.
Laura Goldman 7 Jan 07 12:49
In buying Taro Pharmaceutical Industries Ltd. (TAROF.PK) too soon, I made a rookie’s mistake. Never buy bad management is one of the basic rules of investing. I should have waited patiently until management resigned or was fired before buying the stock.
The management of Taro is in no hurry to leave. The Levitt family has nowhere to go. So they will continue to stuff their faces at the company trough courtesy of the shareholders.
When I was in my twenties, my friends made me promise - no more bad men. Now my clients are forcing me to promise no more bad management. In the eighties, we bought Occidental Petroleum waiting for Armand Hammer to die. Well, he almost outlived us all and we suffered needlessly.
There were plenty of good reasons - or so I thought - to buy Taro. Mark Mobius of Franklin Resources, the Michael Jordan of the mutual fund world, bought 16.8 percent (later reduced to 12%) of the company. Mark might even have a better record than Air Jordan at the free throw line. Reuters, The Sunday Telegraph, Morningstar, and CNBC have all at various times named Mark Mobius number one emerging markets manager. The key to Mobius’ investment success is that he does not sit behind his desk to make investment decisions. Using his Gulfstream jet like the rest of us use our cars, Mark kicks the tires of the companies that he invests in.
I always pay attention to stocks that have fallen as far as Taro has. In 2004, it was $30 and now it's around $12. It is hard for me to believe that the numbers used to justify a price north of $30 were entirely made up, but that seems to be the situation. If that was the case, I thought that management would have received more severe sanctions. It begs the question why Kobi Alexander is public enemy number one.
The company has recently been making many positive announcements about new distribution agreements. I am concerned that these announcements are as accurate as their 2004 revenue numbers.
All of us have to remember that there is sometimes a real reason for the stock’s price. Not all stocks are diamonds in the rough. Sometimes they are just a pig with lipstick on.
Here in Israel, we have seen generic drugs power Teva’s stock rocket into the stratosphere, so our mouths salivate at the word generic. As we have seen with search engine MSN and Google, being in the same field does not guarantee success.
After the Mobius purchase, Ori Heshkovitz of the brokerage firm Leader & Co. came out with an analyst's report suggesting that a merger was a good way for Taro management to get out of their legal liabilities. With sales of $300 million, the company would sell at $600 million to $1 billion, minus $200 million in debt and $100 million in legal liabilities.
Ori’s hypothesis makes sense only if you are dealing with rational management. Clearly, that is not the case here. But the demise of this hypothesis brings to mind another important investment rule. Do not kiss the girl unless you want to marry her. For every one person that has made money buying a stock on a merger tip, there are 10 others that have lost. Investors need to buy only companies that they do not mind holding for the long term.
Now that I am wearing the Scarlet T, what to do? As everyone knows, the stock has been delisted from the NASDAQ. Of course, it is not good news for a stock to be delisted, however in most cases, including this one, the price of the stock is not going to fall precipitously from the delisting. The news was already in the stock. Investors that can not hold pink sheet stocks have already sold.
I am going to hold my remaining position. I sold some when the stock jumped on talk of an Ofer family acquisition.
It might seem that I am being a stubborn investor and that I should get an immediate divorce from Taro. But sometimes couples (stock and stockholder) need to exhibit some patience with each other. I can not foresee any more bad news.
I sometimes have a bad habit of giving up too early. I sell out of frustration or boredom. “I do not want to see that stock on my monitor anymore.” But frustration and boredom are not good reasons to sell.
I would avoid the stock if I did not own it and wait until there is a change in management.
Laura Goldman worked on Wall Street for over twenty years for such firms as Merrill Lynch and UBS Warburg. She now runs her own investment advisory, LSG capital, from Tel Aviv.
Published by Globes [online], Israel business news - www.globes.co.il - on January 7, 2007
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