The super grooviest thing that I think U.S. equities have going for them right now is that they are undervalued according to both five-year and 10-year average forward-looking P/E ratios. At 14.2x forward-looking earnings, the S&P 500 is now priced a bit below the 10-year average, and about a mile and a half below the "free money-palooza" perverse conditions created by the Bernanke-Yellen years at the Fed. Those forward-looking valuations have been screaming ever lower for about three months now, despite third-quarter earnings results that reminded sports fans of the steroid era in baseball. Hmm, pretty good analogy for cause and effect there, Sarge. Oh, thank you.
Even in a risky environment, there will be places to take cover. What about health care? Does the risk increase after the Texas challenge to the ACA, or does this risk abate now that the Democrats take control over the House of Representatives? Perhaps. Obvious benefactors would be hospital stocks, as the focus possibly shifts from outright repeal to hopefully some kind of repair. Now, what happens to drug stocks? Merck (MRK) and Pfizer (PFE) finished the year as the top performers among the thirty constituents of the Dow Jones Industrial Average. Will the focus remain on pricing reform, or shift, as some think, toward coverage expansion?
That's not entirely up to Congress, as my thought here is that at least some drug prices are now visibly reaching the limits beyond the means of folks who truly need treatment. This is where the laws of elastic demand will, I believe, force drug companies to seek the expanded coverage route in greater size than what we have seen previously. This may end up benefiting not only consumers, but the companies themselves.
Pfizer was really a name that I meandered into for their (now recently increased) dividend. My other names in the space have both performed well -- Abbott Labs (ABT) -- and not so well -- Amgen (AMGN) -- for various reasons. Pfizer, though, not only may benefit from the changing environment, but from merging the firm's consumer health care business into a joint venture with GlaxoSmithkline (GSK) that will be 32% owned by Pfizer. This deal will reduce costs for both firms, and is expected to be accretive somewhat for Pfizer moving forward.
My thought is that it is probably okay to maintain a long position in Pfizer. The behavior appears stable. Downside risk is not what I would consider to be outsized, even after a good year. The 36-month beta stands at just 0.75. That combined with the 3.3% dividend yield make this, for me, a desirable position. Note, though, that the Pitchfork has not been strictly obeyed throughout the year, that the trend remains very much intact, while standard Fibonacci levels do appear playable for the short-to-medium-term crowd.
--Status: Add on dips.
--Target Price: $49
--Panic Point: $39
Trade Idea (minimal lots)
--Purchase 100 shares of PFE at or close to the last sale $43.65;
--Sell one PFE June $49 call (Last: $0.71) in order to reduce basis to $42.95. By then, dividend payments (next payment of $0.36 to shareholders of record on Feb. 1) should knock another $0.72 off of this investor's net basis.(An earlier version of this column appeared at 8:07 a.m. ET on Real Money, our premium site for active traders. Click here to get great columns like this from Stephen "Sarge" Guilfoyle, Jim Cramer and other experts throughout the market day.)