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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Express Scripts raises the bar for PBM stocks

Facebook’s recovery taught a long-term lesson to a former investor. (Associated Press)
Universal Uclick

Prescription drug costs are rising amid intense pressure to keep health care costs down. What’s the investing opportunity here? Pharmacy benefit manager (PBM) stocks, such as Express Scripts (Nasdaq: ESRX).

Express Scripts stands out as the biggest (and arguably the best) pure-play PBM. The company generated more than $100 billion in revenue last year, with more than $2 billion of that total hitting the bottom line. That matters, because a PBM with large volume can win favorable price concessions from pharmaceutical companies.

Express Scripts proved this in a highly public way in late 2014 in its deal with AbbVie to lower the skyrocketing costs of hepatitis C drugs for its customers. Expect it to wage a similar battle in the near future over a new class of potentially pricey cholesterol drugs.

Probably the biggest knock on Express Scripts is its debt load of more than $12 billion, a byproduct of a series of acquisitions over the last few years (including a 2012 merger with Medco). However, Express Scripts should be able to comfortably service this debt with its cash flow.

The company could also face some short-term uncertainty from health insurer mergers and acquisitions, but it remains a promising investment for the long run, and it’s appealingly priced, with a forward-looking price-to-earnings (P/E) ratio in the mid-teens. (The Motley Fool owns and has recommended Express Scripts.)

Ask the Fool

Q: The stock market’s 2 percent drop on June 29 unnerved me. What should one do if the market crashes? – F.Y., Hattiesburg, Mississippi

A: The most important thing is not to panic. After all, the market recovered from that drop fairly quickly. The market always rises and falls, sometimes sharply. That’s why you shouldn’t have any money in stocks that you’ll need within, say, five (or better still, 10) years.

In the near term, anything can happen, including a crash and prolonged slump. Over the long run, though, the market has recovered from all its crashes and has gone on to set new highs – eventually.

So brace yourself for inevitable occasional downturns. Know that while a $2,000 investment might grow to be worth $4,000 within a few years, it might also drop to $1,500 in short order. Over the long haul, if a company is healthy and growing, its stock price should catch up to the company’s worth.

Market crashes often deliver bargains, too. As Warren Buffett has advised, be fearful when others are greedy and greedy when others are fearful.

Q: How can a stock sometimes begin trading in the morning much higher or lower than where it closed the day before? – I.B., Adrian, Michigan

A: If Tattoo Advertising Co. (ticker: YOWCH) closes at $50 on Monday but opens on Tuesday morning at $44, there was probably some news that caused sell orders to pile up all night long, such as slowing sales, a departing CEO or a big lawsuit. If the stock is suddenly up several points, Tattoo may have reported strong earnings or announced a promising new venture. Big moves can also be due to rumors or news of a merger or buyout.

My dumbest investment

I’m thankful I’ve made very few calls this bad: I was offered shares of Facebook at its initial public offering (IPO) price of $38 and bought 500 of them for $19,000. The stock never popped on its opening day, as many do. In fact, within three months, it fell into the high teens. I sold my shares for about $20 apiece and lost roughly $9,000.

The investment represented a tiny percentage of my portfolio so it wasn’t a big problem, but it still smarted. The stock took more than a year to return to $38 and surpass it.

I learned my lessons: Don’t waste time with IPOs, as you can’t control your entry point. And as a group, IPOs have a very poor record, mostly losing money for the buyers. Happily, I didn’t lose my shirt in order to learn these things. Holding for the long term is the way to go. – T.C., online

The Fool responds: Your last point is the most important lesson: For best results, aim to hold for the long term. If you believed in Facebook’s long-term promise, hanging on would have been best, with the stock recently near $90. Since many IPOs feature stocks that soar on their first day, luring naive buyers to buy high, only to then watch as the stocks fall over the next year or so, it’s often best just to avoid IPOs.