Morningstar Advisor - April/May 2009 - 63
make sure we are not missing anything. Sum-of-the-parts analysis is helpful for the large, diverse firms that have many divisions. This analysis not only helps us confirm our discounted-cash-flow analysis, but also sheds light on the primary value drivers within complex companies like Abbott Laboratories. Additionally, we perform relative valuation analysis across the pharmaceutical industry with several metrics, including price/earnings, enterprise value/EBITDA, and others. The comparable analysis yields a gut check to determine how each company in the pharmaceutical industry stacks up to one another. Beyond using different valuation techniques, we also stress test our sales assumptions for new drugs. We run bear and bull cases for any critical new drug, which helps segment a range of valuation outcomes based on different scenarios for an important drug. For most major pharmaceutical firms, the range in valuation based on one drug usually can change the valuation by up to 5% to 8%. The range helps determine the degree of uncertainty surrounding the fair value estimate. HK: Would you recommend buying a basket of Big Pharma stocks—through an ETF, for example—or cherry-picking a few names? DC: Picking a couple select drug companies should offer investors better rewards than an ETF. For the most part, a Big Pharma stock will likely perform in line with a pharmaceutical ETF, especially stocks like Johnson & Johnson and Pfizer. Because Big Pharma offers such a wide portfolio of drugs, stock prices tend to move in tandem with each other. However, the extra reward offered by picking a few select names should offset the risk of less diversification than provided by an ETF. The current valuations of certain pharmaceutical firms like Novartis make this particularly true. They offer strong risk-adjusted return potential. K Haywood Kelly, CFA, is vice president of equity research at Morningstar. Chris Davis Bill Gross Bob Rodriguez John Bogle Don Phillips Strong Voices. Smart Conversations. Morningstar Investment Conference May 27–29, 2009 McCormick Place, Chicago Register Today! Gain the investing insight you need in this economy. Conference registration includes access to all conference sessions and the exhibit hall; 2 continental breakfasts, 2 lunches, and 2 cocktail receptions; and an opportunity to earn CE credits. Online: MorningstarAdvisor.com/2009conference Phone: 866 839-9729 MorningstarAdvisor.com 63
http://www.MorningstarAdvisor.com/2009conference
http://www.MorningstarAdvisor.com/2009conference
http://www.MorningstarAdvisor.com
Morningstar Advisor - April/May 2009
Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2009
Morningstar Advisor - April/May 2009
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
Did Diversification Fail Investors?
Accounting for His Success
The Classics
Investment Briefs
A Multiple-Lens Approach to Analysis
Where Leverage Lurks
Guide to Finding Hidden Risks
How Leveraged ETFs Compound the Misery
Get Rid of the Dead Weight
Grounded Manager
Investors Should Mind Their Tails
Four Picks for the Present
The Future of Big Pharma
Yield Your Clients Can Use
Wide Moats, Good Stewardship: A Potent Bear-Market Combination
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
New at Morningstar
To Beat the Devil
Morningstar Advisor - April/May 2009 - Intro
Morningstar Advisor - April/May 2009 - Morningstar Advisor - April/May 2009
Morningstar Advisor - April/May 2009 - Cover2
Morningstar Advisor - April/May 2009 - 1
Morningstar Advisor - April/May 2009 - 2
Morningstar Advisor - April/May 2009 - Contents
Morningstar Advisor - April/May 2009 - 4
Morningstar Advisor - April/May 2009 - 5
Morningstar Advisor - April/May 2009 - New on MorningstarAdvisor.com
Morningstar Advisor - April/May 2009 - 7
Morningstar Advisor - April/May 2009 - 8
Morningstar Advisor - April/May 2009 - Letter from the Editor
Morningstar Advisor - April/May 2009 - Contributors
Morningstar Advisor - April/May 2009 - 11
Morningstar Advisor - April/May 2009 - Did Diversification Fail Investors?
Morningstar Advisor - April/May 2009 - 13
Morningstar Advisor - April/May 2009 - Accounting for His Success
Morningstar Advisor - April/May 2009 - 15
Morningstar Advisor - April/May 2009 - 16
Morningstar Advisor - April/May 2009 - The Classics
Morningstar Advisor - April/May 2009 - 18
Morningstar Advisor - April/May 2009 - 19
Morningstar Advisor - April/May 2009 - Investment Briefs
Morningstar Advisor - April/May 2009 - 21
Morningstar Advisor - April/May 2009 - 22
Morningstar Advisor - April/May 2009 - 23
Morningstar Advisor - April/May 2009 - 24
Morningstar Advisor - April/May 2009 - A Multiple-Lens Approach to Analysis
Morningstar Advisor - April/May 2009 - 26
Morningstar Advisor - April/May 2009 - 27
Morningstar Advisor - April/May 2009 - 28
Morningstar Advisor - April/May 2009 - 29
Morningstar Advisor - April/May 2009 - 30
Morningstar Advisor - April/May 2009 - 31
Morningstar Advisor - April/May 2009 - Where Leverage Lurks
Morningstar Advisor - April/May 2009 - 33
Morningstar Advisor - April/May 2009 - 34
Morningstar Advisor - April/May 2009 - 35
Morningstar Advisor - April/May 2009 - Guide to Finding Hidden Risks
Morningstar Advisor - April/May 2009 - 37
Morningstar Advisor - April/May 2009 - 38
Morningstar Advisor - April/May 2009 - 39
Morningstar Advisor - April/May 2009 - How Leveraged ETFs Compound the Misery
Morningstar Advisor - April/May 2009 - 41
Morningstar Advisor - April/May 2009 - Get Rid of the Dead Weight
Morningstar Advisor - April/May 2009 - 43
Morningstar Advisor - April/May 2009 - 44
Morningstar Advisor - April/May 2009 - 45
Morningstar Advisor - April/May 2009 - 46
Morningstar Advisor - April/May 2009 - 47
Morningstar Advisor - April/May 2009 - 48
Morningstar Advisor - April/May 2009 - 49
Morningstar Advisor - April/May 2009 - Grounded Manager
Morningstar Advisor - April/May 2009 - 51
Morningstar Advisor - April/May 2009 - 52
Morningstar Advisor - April/May 2009 - 53
Morningstar Advisor - April/May 2009 - Investors Should Mind Their Tails
Morningstar Advisor - April/May 2009 - 55
Morningstar Advisor - April/May 2009 - 56
Morningstar Advisor - April/May 2009 - 57
Morningstar Advisor - April/May 2009 - Four Picks for the Present
Morningstar Advisor - April/May 2009 - 59
Morningstar Advisor - April/May 2009 - 60
Morningstar Advisor - April/May 2009 - The Future of Big Pharma
Morningstar Advisor - April/May 2009 - 62
Morningstar Advisor - April/May 2009 - 63
Morningstar Advisor - April/May 2009 - Yield Your Clients Can Use
Morningstar Advisor - April/May 2009 - 65
Morningstar Advisor - April/May 2009 - Wide Moats, Good Stewardship: A Potent Bear-Market Combination
Morningstar Advisor - April/May 2009 - 67
Morningstar Advisor - April/May 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - April/May 2009 - 69
Morningstar Advisor - April/May 2009 - 70
Morningstar Advisor - April/May 2009 - 71
Morningstar Advisor - April/May 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - April/May 2009 - 73
Morningstar Advisor - April/May 2009 - Undervalued Stocks
Morningstar Advisor - April/May 2009 - 75
Morningstar Advisor - April/May 2009 - 76
Morningstar Advisor - April/May 2009 - 77
Morningstar Advisor - April/May 2009 - 78
Morningstar Advisor - April/May 2009 - New at Morningstar
Morningstar Advisor - April/May 2009 - To Beat the Devil
Morningstar Advisor - April/May 2009 - Cover3
Morningstar Advisor - April/May 2009 - Cover4
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