Snow Capital Management leader Richard Snow (Trades, Portfolio) disclosed this week that he reduced his Lannett Co. Inc. (LCI, Financial) position by 84.76% on Aug. 21.
The guru’s Milwaukee-based firm takes a contrarian, relative value approach to stock picking, typically investing in financially strong companies that are experiencing a temporary setback.
According to GuruFocus real-time picks, Snow sold 2.04 million shares of Lannett for an average price of $5.70 per share, impacting the portfolio by -0.53%. He now holds 367,208 shares, which represents 0.1% of his equity portfolio.
GuruFocus data shows he has lost an estimated 60% on the investment since the first quarter of 2016.
In August, the stock suffered its biggest one-day selloff in 25 years after the Philadelphia-based pharmaceutical company, which produces generic versions of brand name medications, announced the loss of a major supplier. The supplier, Jerome Stevens Pharmaceuticals, whose contract with Lannett expires next March, instead chose to ink a 10-year deal with Amneal Pharmaceuticals Inc. (AMRX, Financial) to distribute its top-selling generic levothyroxine sodium tablets for thyroid disorders in addition to two other drugs.
Adding to the pain, a class-action lawsuit was filed against the company on Sept. 10. The case is seeking to recover damages for Lannett investors under the federal securities laws. The company is accused of failing to disclose to investors that its contract with Jerome Stevens Pharmaceuticals was in peril of not being renewed, thereby misleading them in regard to its financial outlook.
The stock has tumbled approximately 78% year to date.
Valuation
Weighed down by poor interest coverage and a slowdown in revenue per share growth, Lannett’s financial strength was rated 5 out of 10 by GuruFocus. The Altman Z-Score also indicates the company is at risk of going bankrupt.
The company’s profitability and growth fared better, scoring a 9 out of 10 rating. The rating is supported by an expanding operating margin, a high Piotroski F-Score of 7 and a business predictability rank of one out of five stars. GuruFocus says companies with this rank typically see their stock prices gain an average of 1.1% per year.
Lannett has a $201.51 million market cap; its shares were trading around $5.18 on Thursday with a price-earnings ratio of 6.99, a price-book ratio of 0.32 and a price-sales ratio of 0.29.
The Peter Lynch chart shows the stocks is trading below its fair value, suggesting it is undervalued.
Before paring his stake, Snow was the company’s largest guru shareholder. Pioneer Investments (Trades, Portfolio) now has the largest position with 2.03% of outstanding shares. Ronald Muhlenkamp (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) also hold the stock.
Portfolio performance
Snow’s $2.18 billion equity portfolio, which is composed of 138 holdings, is heavily invested in the financial services sector.
Health care stocks make up 11.63% of the portfolio. Other drug manufacturers Snow has positions in are Johnson & Johnson (JNJ, Financial), Merck & Co. Inc. (MRK, Financial) and Pfizer Inc. (PFE, Financial).
According to GuruFocus, the All Cap Equity Composite Fund returned 13.32% in 2017, underperforming the S&P 500’s 21.71% return.
Disclosure: No positions.
