LAC - Fallen Angels Part II: The Dodgeball 7

2023-12-14 16:27:07 ET

Summary

• Year-end tax-selling and institutional window-dressing create opportunities to buy beaten-down quality companies.
• Lithium Americas and Pfizer are two companies that have hit their 12-month lows and are considered viable with potential for future growth.
• LAC owns the largest known lithium mining property in the US, while PFE has a strong cash flow and a diverse pharmaceutical pipeline.
• PFE is selling at a fire sale price.

For those who missed my previous analysis on my first two Fallen Angels for 2024, I discussed the reasons why year-end tax selling and institutional window-dressing often create huge opportunities for those willing to buy beaten-down quality companies in this time frame. Two more follow below and the remaining three I will publish next week.

Every year from Thanksgiving to Christmas I seek companies that I believe exhibit high quality and offer excellent long-term growth, but which have been batted down or crashed and burned. If my further analysis says "this too shall pass" as these companies resume their growth trajectory, I select them for myself, some of my investment advisory clients for whom they are appropriate, and for my Growth and Value model portfolio.

So why do I refer to them as The Dodgeball 7?

In that first article, I said that one of those companies "is like the kid who gets picked last for dodgeball." Nobody wants him or her on their side because they look kind of scrawny and weak, an easy target. But the great thing about dodgeball as opposed to, say, sumo wrestling, is that if you're quick and smart you can avoid the incoming and get a shot at the other side by patience, timing, and a mean throw. (PS, in case you haven't played for a while: Watch out for wiry little guys and girls with a glint in their eye when they release the ball. So much for scrawny and weak!).

I think these companies meet those criteria. Disrespected by many, but nimbler than most believe, and ready to give back as good or better than they get.

Today I have selected two very different companies that I'm now buying. Both hit their low for the trailing 12 months as of Dec. 13. Both are viable firms with, I believe, a great future.

The first, Lithium Americas Corp. ( LAC ), fell to a 12-month low of $5.80 - and promptly rose 10% to close at $6.44.

Lithium Americas owns the largest known lithium mining property in the United States. It's in the very first stages of development, however. Patience will be necessary and, I believe, rewarded. At these prices, it's easy to put some shares aside and follow the company's progress.

As a Canadian company, LAC qualifies for US government loans to develop this and other possible sites in the US. In addition, the company has already secured a $650 million loan in tranches as well as an offtake agreement with General Motors.

The first deliveries of lithium are not expected until 2026. It's easy for me to stay informed; not only is their website updated frequently with new information, but the Thacker Pass project is in northern Nevada, just a couple of hours away from my home. Construction commenced earlier this year after all manner of legal challenges, some serious, some frivolous. All challenges were settled in favor of LAC up to the level of the 9th Circuit Court.

Thacker Pass is the largest known M&I (Measured and Indicated) lithium resource in the United States and there may be much more to come. While LAC owns the rights to mine Thacker Pass, the company also owns the rights to mine an area, also within the McDermitt Caldera area, of three times as much land as they have at Thacker Pass, a good amount of which may hold even greater amounts of sedimentary (also called clay or "clay-bound") lithium.

If these other discoveries occur, LAC already has processing facilities, roads and rights-of-way, and agreements with local communities. In my opinion, it's essential for national security that North American nations not be dependent upon some faraway region or foreign power for their future energy needs. LAC also has already been through the wringer with various groups trying and failing to stop the project from going forward. (It's amazing how the same groups that insist on no more oil and gas also are the first in line to prevent the use of an effective alternative!).

As I wrote just this morning:

• Today there's a glut of lithium. That will change. Patience.
• Lithium America owns what looks to be the biggest concentration of lithium in the US - possibly the world.
• The US DOE "might" extend significant loans to LAC to ensure this project is developed in the US.
• At these prices, we can afford to be patient.

My second pick is more controversial. Those who have owned this stock for a long time hate it. It has been a serious under-performer for years. Pfizer Inc. ( PFE ) just reached its lowest price in the past 12 months. The reason is the company just issued 2024 guidance below analyst expectations. The disappointment institutions, analysts, and investors felt when Pfizer downgraded their expectations reverberated throughout the day.

The Wall Street Journal noted, "The company also said it is targeting adjusted earnings in 2024 of $2.05 a share to $2.25 a share, below the $3.17 a share that analysts surveyed by FactSet expected."

For those of us just buying now, without the weight of PFE's troubled recent shortfall, this looks like an opportunity to buy when many of those disappointed owners are throwing in the towel and selling the company at fire sale prices. Here's why:

Pfizer hit its 52-week low this morning at $25.76. It closed at $26.66. A year ago, the company's shares were trading hands at $54.48. According to the Wall Street Journal, this closing price was the lowest in "nine years" for Pfizer. A greater than 50% decline in a single year. Even with the kitchen-sinking bad news the company delivered, that gets my attention.

If we take the company's lowest projections for 2024, $2.05 a share, and divide the current price by that number, that means PFE shares sell at a forward P/E of 13. I think that is eminently reasonable.

Pfizer's cash flow looks strong enough to continue the dividend at something just under 6% after this latest tumble. Part of their problem in the immediate term is that the US government concluded that the US does not need as much COVID protection in 2024 as originally thought. However, Pfizer negotiated with the US government to provide vaccine support for an additional five years. This made 2024 look weak, but the profits will still flow, just a bit delayed, through 2028.

PFE is a $160 billion market cap company with numerous pharmaceuticals in its pipeline. Its current purchase of Seagen Inc. ( SGEN ) will add a fine portfolio of cancer drugs in development, along with SGEN's oncology development platform. I see a large established company that has years of hits and misses, typical of the risks taken by these firms in their quest for lifesaving or life-enhancing drugs, in the pipeline.

Pfizer looks to me right now as the kind of company Mr. Buffett had in mind when he said "be fearful when others are greedy and be greedy only when others are fearful."

And, thinking about all seven of my suggestions for your due diligence (four down, three to go) let me pay homage to Charlie Munger as well:

"I have a friend who's a fisherman. He says, 'I have a simple rule for success in fishing. Fish where the fish are.' You want to fish where the bargains are. That simple. If the fishing is really lousy where you are, you should probably look for another place to fish." - Charlie Munger.

Good, smart investing,

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