A fellow blogger hits the nail on the headlooking at a recent analyst call on IBM stock.
Late Monday drug giant Pfizer (PFE) announced a 21 percent increase in its annual dividend, to $1.16 per share. With the stock trading at $25 and change, the new current yield on the stock is a whopping 4.5 percent. I speculated about two weeks ago that investors should expect a bump in the payout of 15 percent, so the magnitude of this increase is a positive surprise from my perspective.
The share price of PFE is unchanged on this news, but is it indeed an immaterial event? I believe value investors will add to positions in light of the more than 20 percent boost to the dividend. Pfizer’s yield should not be equal to that of long-term treasury bonds, and the market will likely correct this.
Assuming investors’ demand for PFE increases, I would expect the yield to fall back toward the 4 percent level. This would put the shares of Pfizer at $29 each, about 12 percent above current levels.
Full Disclosure: Peridot owns shares of Pfizer
A few years back CNBC, in partnership with MSN and some investment companies, began promoting the “StockScouter” ranking system. The quantitative formula ranked stocks using a 1-10 scale on numerous criteria and investors could sort companies by their StockScouter ranking on the CNBC/MSN web site.
This was fine, except they took it a bit too far by mentioning the StockScouter ratings constantly on the air during CNBC broadcasts. After each executive interview they would tell you what StockScouter said about the company being profiled. Not only that, but when portfolio managers came on air recommending stocks, their opinions were followed by a comparison to StockScouter’s opinion, which often led to the awkward on-air moment when a top-rated fund manager was told by Sue Herrera that StockScouter rated their top holdings “a 2 out of 10.”
Fortunately the StockScouter was removed from CNBC airwaves eventually, probably due, in part, to the fact that it would give very high “safety” ratings to stocks like eBay (EBAY) and Yahoo! (YHOO) on a consistent basis, shares that clearly were not “safe” investments.
Well, it looks like CNBC is wasting viewers’ time again with the relaunch of “the new CNBC.com” web site. The site went live in recent weeks and at every moment they get, CNBC anchors try and convince viewers that the information on the site is somehow new and better than any other site out there. Among the earth-shattering innovations on the new CNBC.com; advanced charting, up-to-the-minute news items, and even… hold your breathe… a portfolio tracker!
They even have a special desk where anchors sit and guide viewers step by the step through the process of charting a stock, etc. I know CNBC has plenty of time to fill during the day, and obviously they want people to go to their web site. However, hyping their product offerings so much during the actual broadcasts, especially when it has little to do with the rest of their content, is extremely annoying. They really should just run a few commercial spots every hour to advertise the web site so people like me aren’t tempted to change channels when they do a segment of CNBC.com 101.
I’ve been spending time on the Peridot Capital 2007 Select List lately, hence my blogging frequency has slowed a bit. At any rate, my strategy for 2007 is going to be a bit different than last year. With the market having done extraordinarily well since August or so, my tendency to take a very contrarian approach will be even more apparent than usual as we head into early next year.
I forget the exact number of days, but it has been a very long time since we have had a 10% correction. I’d be surprised if one didn’t come next year. After we get a sell-off, and therefore digest these out-sized gains we’ve seen, I’ll likely become more aggressive. Until then, my investment selections (as readers will see when the 2007 Select List is issued during the first week of January) will focus on large caps that have lagged the market in 2006, as well as smaller cap growth stocks that should continue to do well regardless of the domestic economic environment in 2007 (I’m not going to try and predict when, if at all, a recession will hit, as it’s anyone’s guess).
Despite the double digit gain in the S&P 500 so far this year, my research recently has uncovered many large cap growth companies that are trading at market multiples. Earnings growth for these firms should be above-average, but for some reason their P/E multiples are not. The common debate among Wall Street strategists right now, as they try to gauge the market’s overall direction in 2007, seems to revolve around whether or not the S&P 500 multiple should remain around 15 or 16, or perhaps rise to the 17-18 area. I’m not really comfortable forecasting P/E expansion in 2007, but for companies that are set to grow earnings per share at 12 to 15 percent annually for the rest of the decade, there is no doubt in my mind that a 15 or 16 P/E is too conservative. So, while I believe market gains overall in 2007 will be below 2006 levels, there are still values to be had.
Stay tuned for more details, both in the upcoming second annual Select List, as well as future blog postings.
As you may have noticed, 2006 has been the year of the consumer IPO. Familiar and popular consumer brands have debuted on the public market to much fanfare. Names like Chipotle Mexican Grill (CMG), Crocs (CROX), Mastercard (MA), and UnderArmour (UARM) have all made investors a lot of money. Of that group, Crocs is really the only one that I looked at and said to myself, “Boy, that will be a great short when the fad dies and the stock’s momentum dies down.”
Well, that is until we learned that a roller shoe company called Heely’s (HLYS) was going public at $21 per share on Friday, putting the firm’s value at more than half a billion dollars. Shoes with wheels on them? Wall Street can’t be serious.
I am not saying the company isn’t selling a lot of shoes right now, and retail investors are going to bid the stock up a lot just like they did with Crocs as soon as it starts trading. That said, I can’t believe this company is going public. It must say something about the overly bullish stock market environment we find ourselves in right now.
While I won’t be buying any Heely’s shares, I hope they go through the roof. Maybe the company’s market value even hits a billion dollars or two when it’s all said and done. What an excellent short candidate that would make it.
In yesterday’s Pfizer piece I mentioned I had planned a broader look at the drug stocks, but focused only on the story du jour. Here are some thoughts on the sector that I wrote before the Pfizer news:
Not too long ago I wrote about pharmaceutical giant Pfizer (PFE) and how it trades at a seemingly steep discount to its peer group, and boasts a 3.9% dividend yield to boot. With the broad equity market having rallied sharply since August, investors looking to get a little more defensive can often find solid bets in the healthcare space. I decided to look at 12 of the larger drug companies to see if any other values are out there other than Pfizer. It appears there are.
I have actually been underweight healthcare stocks for some time. This had little to do with a lack of confidence in the macroeconomic outlook for the sector, and everything to do with the fact that I just couldn’t really find too many bargains. While many of the drug stocks still appear to be fully valued, sideways trading in several stocks in biotechnology has resulted in extreme price-earnings multiple compression.
Followers of the sector know very well that biotech stocks have traditionally traded at premiums to their big pharma counterparts, mainly due to the fact that they tend to be smaller, and therefore one big product breakthrough can have a dramatic effect on the company, and fuel substantially higher earnings growth. It appears in today’s market, however, that the two subsets of healthcare have converged as far as valuations go. As a result, I think there are opportunities for investors to capitalize.
Below you will see summaries of a dozen drug companies, sorted in ascending order of forward P/E ratio. Also included are current dividend yields and projected growth rates in 2007 for both sales and earnings. Grouping the names in this manner makes it a lot easier to spot the relative values.
In group “A” you will find the aforementioned Pfizer, which trades at a discount to its peers. Sanofi (SNY) is close, but yields about 50% less. Glaxo (GSK) rounds out the trio of below-market multiple stocks, but Pfizer still looks the best to me based on valuation and their dividend. Also, you may have read that the new CEO there recently decided to cut 20% of their salesforce. Further cost cutting is likely, and expect dividend increases to be consistent over time.
The second group of stocks (“B”) are those that trade around a market multiple. In this group, I highly favor Amgen (AMGN). I know they lack the 3-plus percent dividend of Eli Lilly (LLY) and Merck (MRK) but the double digit growth rates are very impressive, and AMGN has rarely traded at a sub-16 P/E.
Groups “C” and “D” are mostly biotechnology companies, but somehow both Bristol Myers (BMY) and Schering Plough (SGP) are trading at a premium to Genzyme (GENZ) and Biogen (BIIB) despite far less growth potential. Again, the fat dividend yields are a factor here, but I still believe there should be a valuation gap between biotechs growing at double digit rates and big pharma muddling around in the single digits.
Full Disclosure: Peridot owns shares of Pfizer and Amgen
I was actually planning a broader pharmaceutical post today, but in light of the Pfizer (PFE) news over the weekend, I just wanted to talk about them a bit first. Peridot has a small holding in PFE, and will not be selling into today’s weakness. My bias would be to buy more, not sell. The news that the company is abandoning its lead cholesterol-fighting compound is obviously hardly a positive development. However, despite losing a key drug in its pipeline, the reasons I like Pfizer have not changed dramatically with this news.
Pfizer still trades at the lowest multiple in the big pharma group. Investors can certainly argue that such a price is warranted given the issues with their development pipeline, coupled with the fact that they are projecting flat revenues for 2007 and 2008. That said, once growth resumes in 2009 and beyond there will be outsized upside potential with such a depressed stock price. The bar will be set quite low when business begins to turn.
The stock is down more than 10 percent today to $24 per share. The current $0.96 annual dividend puts the stock’s yield at around 4 percent. I would expect a dividend increase to be forthcoming. A boost of 15% or more (to at least $1.10 per share) equates to a 4.6% yield, which is more than that of a 30-year U.S. treasury bond.
A floor on the stock due to the large dividend is not the only reason the shares are attractive at $24 each. Investors should expect accelerated cost cutting measures by management, increased share buybacks to appease upset investors, as well as an increased focus on M&A to boost their product pipeline. These moves will be largely received well on Wall Street, as they will allow the company’s earnings per share to hold up well (and even grow) for the next couple of years until new products can fuel larger growth in the drug business.
With the stock yielding 4 percent and trading at 12 times earnings, the downside for PFE is limited. Don’t get me wrong, this is a longer term play. The stock is not going to $30 overnight. However, the stock will pay you like a long-term bond while you wait for the picture to improve, and if some new blockbuster drugs do come to market over the next several years, there is no reason to think the stock could not reach the 40’s again. Add in the dividend payments and this defensive healthcare play could meaningfully boost portfolio returns over that time.
Full Disclosure: Long shares of PFE at time of writing