The Importance of Doing Your Homework When Investing


By: David Kliff

Walk into any pharmacy and pay close attention to the diabetes display. More than likely, you will find the display fairly close to the pharmacist’s counter.

Just as casinos are designed to keep players playing, retail stores are designed to produce maximum sales per square foot of selling space. It shouldn’t surprise anyone that people with diabetes can account for nearly 40 percent of pharmacy sales.

A Cash Cow for Pharmacies

Think of all the items people with diabetes use on a regular basis: test strips, lancets, syringes, insulin, glucose tablets and oral medications.

More important for a pharmacy, these items are needed on a regular basis, which means that once a store and a product capture a customer, that person will be making many return visits—visits that often lead to the sale of non-diabetes-related items.

Does it surprise anyone that every retailer with a pharmacy—whether it’s Wal-Mart (nyse:wmt), Walgreens (nyse:wag) or cvs (nyse:cvs)—covets the customer who has diabetes?

Not All Companies Are Diabetes-Only

The process of looking for investments in the diabetes area goes well beyond companies involved “directly” in the business of diabetes. Even a company such as Johnson and Johnson (nyse:jnj), the owner of LifeScan, wouldn’t be considered a “pure” diabetes investment. In fact, with the possible exceptions of TheraSense (nasdaq:ther) and Amylin Pharmaceuticals (nasdaq:amln), there are very few “pure” diabetes players in the market.

This fact is both good and bad news for the investor.

For example, individuals might invest in Johnson and Johnson because they are regular users of the company’s OneTouch Ultra meter. These investors might not be aware that Johnson and Johnson is about to become the leader in an exciting new technology for people with heart problems—a technology that has the investment community bidding up shares of jnj.

On the flip side, a Humalog user might decide to buy shares in Eli Lilly (nyse:lly), unaware of the company’s troubles in the pharmaceutical area.

Both examples point to the need for investors to do their homework. Just because a company is a leader in the diabetes area does not mean that it is a leader in all areas.

Conversely, many companies that, on the surface, don’t appear to have a diabetes connection are in fact heavily dependent on the diabetes market. What would happen to shares of Walgreens or CVS if people with diabetes decided not to shop in these stores? The fact is that people with diabetes have a tremendous impact on a wide range of companies.

Making Informed Choices

So how, then, does one make an informed investment choice in the diabetes area?

Most important, individual investors should invest with their eyes open and with realistic expectations.

Before making any investment, you should ask yourself a few simple questions:

Why am I making this investment in the first place? Or what investment goal will this investment help me to accomplish?

At what price would I be willing to sell? (This is actually a twofold question. Investors should set price targets not only to capture gains but also to limit losses.)

Do I feel comfortable enough with this investment that I would buy 100,000 shares of the company if I had the resources?

The last question isn’t meant to scare anyone—rather, it’s designed to help an investor focus. If you wouldn’t buy 100,000 shares, why would you buy 100? True, the level of investment is lower, but that really shouldn’t change the answer. Does it make an investor feel any better to lose 20 percent or 30 percent on a $10,000 investment than on a $100,000 investment? People do not invest to lose money. The goal is to one day sell the investment for more than its purchase price.

The answer to the third question also goes a long way toward assessing whether an investor has done his or her homework. It may be overstating the obvious, but a good investment looks better the more research you do. Too many investors become emotionally attached to an investment, no matter what they learn while doing their research. They might even rationalize that a particular piece of disturbing news won’t adversely affect a company’s share price.

The bottom line: you wouldn’t buy a home without having it inspected. Why would you make an investment without doing your homework? This is particularly true when investing in the business of diabetes.



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