TAKING STOCK: Lesser-known pharmaceutical company still offers a good dose of cash

Dear Mr. Berko:

In early 2000, I bought 1,000 shares of Hi-Tech Pharmacal at $4.62 a share. After two splits, I now have 2,250 shares, which I've held through good years and bad years. Today the stock is $35, and I'm getting itchy.

Do you know the company? If so, do you think it can continue to move higher? If I sell the stock, what would you recommend I do with the money I get from what's left after I pay my taxes? My wife wants me to keep the stock. My broker wants me to sell the stock and put the money in a variable annuity paying 6 percent that he says can never lose any money.

I need your opinion as soon as possible

RP, Vancouver, Wash.

Dear RP:

For the record, I must tell you that your advisor is the average thumb-sucking, toenail-biting, low-IQ stock broker. And investors need a lot more than just an average broker to help them make today's difficult investment decisions. So it's important to know that you can lose money in a variable annuity. And brokers who tell you otherwise are disingenuous, thumb-sucking, toenail-biting, low-IQ liars.

Hi-Tech Pharmacal (HITK-$34.32) is a $205 million-revenue specialty pharmaceutical company that designs and sells hard-to-manufacture liquid and semi-solid prescriptives. HITK also makes branded and generic prescriptives and a broad range of opthalmic and inhalation products and is a leading producer of prescription and over-the-counter products for the diabetes market. HITK also makes topical creams, ointments, nasal sprays, multivitamin and nutritional products. Most of their products are marketed to drug stores, wholesalers and supermarkets.

HITK's revenue growth, from $33 million in 2002 to $205 million today, is impressive. HITK's net income, which increased from $3.5 million (32 cents a share) to $46 million ($3.36 a share) in that same time frame, is equally impressive. And in the last 10 years, HITK's book value grew six-fold to $14.55, its cash position grew six-fold to $76 million, and its stock price zoomed six-fold to a recent high of $35.

The company doesn't have any fantastic products on the market, its research department is not high-science, and there are no drug patents that have exciting bragging rights. But what HITK does have is a good product and a good sales force; almost zero debt; a 25 percent return on equity; operating margins of 32 percent; $10 million of free cash-flow per quarter; $76 million in cash; and shares that trade only at 10 times earning.

This is enormously impressive, which is why Schwab; Reuters; Market Edge; Rodman and Renshaw; Needham and Company; and other boutique brokerages have a "buy" rating on the stock. HITK is a glorious cash cow with low risk, so long as management can continue to grow revenues and maintain its generous margins.

HITK's 425 employees should continue to help the company pile up cash, but probably at a slower pace. And I know cash is king, but even kings can be dethroned if they fail to govern well. Now, I don't enjoy being a king killer, but (acquisitions aside) I doubt that management's present product or its new product development has the zip to maintain its current torrid pace in revenue and earnings growth. So because I can't see clearly where the future growth is coming from, I suggest that you sell half your shares (1,125) and put the proceeds in a money market account for now.

Cash gives you time to think. And it takes a lot of good thinking to invest in a market that trades with the speed of Formula One racing cars while the Dow vrooms up 500 points in 60 minutes and then crashes 600 points in the next ten minutes. Before you reinvest that money, however, it might be a good idea to define your investment goals.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Wed, Nov 9, 2011

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