Be Patient With Big Pharma

Major pharmaceutical companies were some of the biggest losers following Tuesday's Democratic victories. Merck (MRK - commentary - Cramer's Take) and Pfizer (PFE - commentary - Cramer's Take) each gapped down more than 2% at the open on Wednesday, with neither working up enough strength to rally near the previous day's closing price.

Some argue that the quick selloff is an overreaction and may prove to be a good buying opportunity. However, if you're looking to increase your exposure to major drug stocks, I believe you'd be wise to hold off for the time being.

The market is rightfully concerned over the Democrats' stance on drug costs for Medicare. It's hard to predict the long-term effect that the political shift in Congress will have on the drug companies' bottom line -- perhaps it will be minimal. But the uncertainty will result in limited upside for shares, as the threat of increased scrutiny and pricing pressure will constantly be on investors' minds.

Those who trade solely on fundamentals will point to Merck's and Pfizer's increasingly attractive product portfolios, strong balance sheets and healthy growth prospects. All of these are fine points that illustrate that these are quality companies.

But the market doesn't trade solely on fundamentals, and the risk profile for these stocks has now shifted. Will these stocks collapse? Absolutely not, but I think those looking to add either of these plays to their portfolios should wait for better prices.

In keeping with TSC's editorial policy, Larsen Kusick doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

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Kusick is a research associate at TheStreet.com, where he works closely with Jim Cramer and works on TheStreet.com Stocks Under $10. Prior to joining TheStreet.com, he worked in options trading and management consulting. He appreciates your feedback; click here to send him an email.

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