When Pigs Fly

Although the swine flu may turn out to just be a wake up call for developed nations' health authorities to dust off their "pandemic plans" and actually see if they are workable, there is little doubt in my mind that this event will stress test the world markets.

With the memory of SARS still fresh in the minds of Torontonians and in particular, the citizens of Hong Kong, fear will probably dictatet o the markets until the coast is clear. I think this will be particularly pronounced in highly populated Asian centres if the flu breaks out there.

Of course, there is no need to panic. You and your family should be prepared for this just like any other natural disaster such as an earthquake. Make sure you have a source of fresh water and lots of canned food. It might be nice to have a supply of N95 masks at home for when you need to enter public places with a high traffic rate of potentially infected people like a grocery store or an airport. Soap and water is plentiful in every home-- use it. A small container of hand disinfectant can be carried around and used each time doors are opened and hands are shook. All simple stuff.

When it comes to a financial strategy, I don't think changing tack makes sense to me. I've used the rally to sell my weaker positions into relative strength and consolidated my portfolio a bit. The majority of my holdings are debt free companies with prodigious free cash flows OR are net-net stocks with unlocked value (i.e. a pile of cash the management needs to be forced to distribute to shareholders...). I think that the game plan should not change one iota. If fear knocks down quality companies' market prices well below intrinsic value, then you should buy them, just like always.

It just so happens that Pharma stocks have been out of favour for a few years now and have some of the best balance sheets and cash flows of any sector. I've been accumulating shares in various companies (NVS, SNY, BMY) over the past 3 years and only sold one (SGP).

One could speculate that some of the Pharma companies will get a boost from world wide stockpiling of anti-viral agents and vaccines; however, I think that this is probably overblown. Roche and Glaxo-Smith-Kline have seen little boosts in their share price because they have Tamiflu and Relenza in their portfolio. Novartis' share price actually dropped a bit this morning despite being assigned the task (and being best positioned to do so) of developing a H1N1 vaccine by WHO and the CDC. This process takes 6 months using the "egg" technique, so they've been told to get cracking. I doubt very much that NVS (which I own, BTW) will profit much from this activity in the short term. I think that it is a great company with excellent prospects, but not because of the swine flu.

Morningstar's article on this topic.

Globe and Mail article.

Pork producers could be hurt temporarily and irrationally by the pandemic. Russia has banned all pork products from North and Latin America and other countries are likely to follow suit. The virus is not spread by ingesting the meat or by dead animals; however, governments are likely to react in this fashion to garner political brownie points from their paranoid electorate. I'm watching SEB carefully for an opportunity to add to my position.