Dr. Reddy's Laboratories: Showing Promising Growth

| About: Dr. Reddy's (RDY)

By Timothy Lutts

Currently, the market is in a correction, and last week it began to inflict some pain on some players. But I have peace of mind because I’ve been here before.

I note the headlines about job losses, the health care bill, pollution controls, GMAC’s cash shortage, the H1N1 flu and the corresponding vaccine shortage, our national debt, the continuing credit crunch, the weak dollar (until last week), Barack Obama’s falling approval ratings and the continuing trouble in Afghanistan, Iran, Iraq and–of course–Israel.

I even read with interest a Wall Street veteran’s comparison of the current period to 1938 on Wall Street, as well as the similarities to Japan in the 1990s … the lost decade for the Land on the Rising Sun.

And I say to myself, 'I’ve been here before.' I know that in time these troubles will either be resolved or fade from view to be replaced by new troubles. And I know that the economy is not the market, and the market is not the stocks I own. I know that I have a choice of what stocks to own. And I know that when nothing is attractive, I can hold cash.

In other words, when it comes to investing, my fate is in my hands.

So, the current market correction means it’s time for some caution. It’s time to cut losses short and sell weak stocks, working, as always to maintain a portfolio of healthy stocks. You want to own winners, not losers.

It’s also time to build a watch list … of stocks you might want to buy when the correction ends and the main uptrend resumes. That it will resume I have no doubt, and that’s because our long-term market timing indicators remain solidly bullish.

So last Friday, while the Dow was dropping 250 points, I took a look at the new highs list. I found 34 stocks, many of them too illiquid and some too stodgy, but one in particular that interests me.

It’s Dr. Reddy’s Laboratories (NYSE:RDY), a major Indian pharmaceutical maker whose biggest market is the U.S., which accounts for 35% of revenues. After that comes Western Europe with 26%, India with 17%, Russia and Eastern Europe with 11% and others with 11%.

This is not a hot stock; it’s too big and too mature to be a fast grower. But I think Dr. Reddy’s focus on generic drugs, which account for 72% of revenues, will pay off big in the years ahead as the health care business pays more attention to cost control. And I think the company’s established connections all over Europe and Russia will bring rewards, too. Ideally, it will get more business in China and other Asian countries, but that will be a harder sell.

The stock earned an appearance in this space back on September 28, when it was trading at 20, and here’s some of what editor Michael Cintolo wrote.

“The big potential here comes from a very long launching pad. RDY peaked at 19 in April 2006, and was stopped there again in 2007 and 2008. It bottomed at 7 in the bear market, and then climbed back up to 17, where it built a tidy little base. But it blasted out of that base two weeks ago, and walked right through the old resistance level of 19, so now there’s no upside limit to its potential. The buyers are in complete control. You could join them now … or wait for a pullback.”

At the time, Mike recommended buying between 18 and 21, and there have been plenty of opportunities to do that over the past month. But last Thursday the stock broke out to a new high. And then on Friday, as I was conducting my search, it ran higher still.

Technically, you could buy it here; the chart is positive. But ideally, you’ll want to wait for a lower-risk entry point, particularly since the broad market is now less supportive.