If you’re wrestling with the problem of how to invest your money at a time when the economy is uncertain, the President is unpopular and the Fed is out of ammunition, then how about investing in trouble with a capital T? The stocks I’m thinking of are the headline grabbers of the last couple of months—not that any of them wanted to be. Goldman Sachs was fighting the SEC over civil fraud charges relating to a smelly CDO that it sold investors, BP was mucking up the Gulf (and its image) with a wildly uncontrolled oil leak and Smithkline was facing down the FDA over the future of its blockbuster diabetes drug Avandia.
Two of these stocks have rallied in the last 48 hours as the clouds over their futures have begun to clear. Goldman reached a not-too-painful settlement with the SEC, and BP successfully capped the leaking well (at least the cap was holding as of Friday.) Both stocks shot up on the news. GlaxoSmithkline got a bit of good news too in that the FDA voted not to take its controversial diabetes drug, Avandia, off the market. Instead, the FDA voted to restrict its use. This week the drug company also said that it was taking a charge of $2.4 billion to cover current and future settlements resulting from lawsuits relating to Avandia and other issues. The stock is way off its 2010 highs, but there is lingering concern about its drug pipeline now that Avandia’s market growth is in question. The drug still faces a review by the European Medicines Agency.
Why buy stocks that are oozing trouble? Why buy companies that are forking over many millions, even billions of dollars in fines, settlements and clean up costs? First, let me say that I am not actually buying them, just writing about the idea. But that said, with the economy uncertain, the consumer tapped out, the world slowing down, isn’t the trouble you know better than the trouble you don’t? On top of that, these are three great franchises that have taken decades to build, and among the three there is broad diversification (a resource play, healthcare and financial services.) I’m not suggesting that it will be smooth sailing with these stocks, only that the market may be discounting their risks more harshly than it is discounting the broad economy’s risks. Moreover, analysts are turning bullish as the clouds clear. On Goldman, Sanford Bernstein analyst Brad Hintz has set $200 as a target price; at Oppenheimer, Goldman has been raised to “outperform” with a target price of $213 (the stock was trading Friday in the low $150s). There are still a few too many uncertainties surrounding BP’s well cap to call it a screaming buy, and Glaxosmithkline’s Avandia saga has a few more chapters to play out, but I wouldn’t be surprised to see these stocks find their way onto buy lists as the questions are resolved and the risks decline. As for the broad stock market, Friday selloff was a good indicator that investors see risks rising, not falling.