One thing I’ve learned over the years is when a big, blue chip stock gets hammered on bad news it is usually a buying opportunity. The example that comes most readily to my mind is Phillip Morris, now Altria (MO). Over the years when MO has lost a big tobacco suit the stock has fallen out of bed. But the truth of the matter is that whatever you think of the tobacco business, MO is a very well managed and profitable company. So those kind of news events have usually turned out to be buying opportunities.
I think the same thing may be going on with Merck (MRK). Yesterday the company announced that it was going to pull its arthritis drug Vioxx due to increased heart attack and stroke risks that will cost the company $750 million in revenue, and up to 60 cents a share in profit in the fourth quarter. But the voluntary move also may help fend off the inevitable lawsuits.
The stock was creamed, down 27% yesterday. Merck is about as blue chip as a stock can get. I think the edge is that the stock is a buy at these levels. Now notice I’m using the word, “edge” -- an indication of a higher probability of one thing happening over another. In other words, it’s far from a sure thing.
Before you ask, the same is not true of Fannie Mae (FNM). Fannie is not well managed at all, and in fact appears to be run by crooks. Fannie is more reminiscent of Intel and WorldCom than of Merck.