Can Pfizer Continue Its Surge Higher?

  on February 26 2013 1:19 PM

With shares of Pfizer (NYSE:PFE) trading around $26, is PFE an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for a Stock’s Movement

Pfizer is huge biopharmaceutical company that is primarily involved in the research, development and distribution of medicines and people worldwide. Its sheer size allows it to have the resources that it needs to remain a titan in its industry. In a world with such a large population that has not been reached and with healthcare taking a greater share of importance, Pfizer is a company that is poised to profit for years to come.

T = Technicals on the Stock Chart are Strong

Pfizer’s long term chart shows the monster run that the company, like many, had in the 90s. Soon after, however, the stock began downtrending for the next 8 years. Recently, Pfizer broke this long term downtrend and has been seeing higher prices on higher highs and higher lows, a beautiful uptrend. Looking a little deeper, the stock is in a selling zone that ranges from the $27-$30 area. So, Pfizer stock may pause a bit before resuming its higher trend.

A trend can be evaluated a little easier using key simple moving averages: the 50-day, 100-day, and 200-day. What are these key moving averages saying about the trend in Pfizer stock? Currently, the stock price is above its consecutively stacked 50-day, 100-day, and 200-day simple moving averages, meaning that the stock is in an uptrend. How can we assess the strength of a trend? The direction. The key moving averages for Pfizer stock are all pointing upwards, signaling a strong uptrend. Ultimately, the moving averages are pointing towards an uptrend that is strong.

One other key factor that determines the success of a stock is investor sentiment. A way to gain insight into investor sentiment is through the use of the options market. More specifically, taking a look at the implied volatility and implied volatility skew levels of Pfizer options may help determine if investors are bullish, neutral, or bearish. The implied volatility of Pfizer options is at 19.94 percent today, which coincides with a 96th percentile over the last 30 trading days and 83rd percentile over the last 90 trading days. What does this mean? This means that investors or traders are buying a significant amount of protection compared to the last 30 and 90 trading days. The implied volatility skew of March and April put options is steep, while call option skew is flat. Now, what does this mean? As of today, there is a low demand from call buyers or high supply of call sellers, while there is high demand by put buyers or low demand by put sellers, all neutral to bearish over the next 2 months. So, investors are buying a significant amount of protection and are leaning neutral to bearish over the next 2 months.

E = Earnings Are Increasing Quarter-Over-Quarter

A mature company, like Pfizer, will see less influence from their earnings growth and revenue growth numbers than a stock who’s valuation is solely dependent on growth (earlier stage companies). Regardless, investors still expect a mature company to perform well. Over the last 8 quarters, Pfizer has seen earnings growth of: 372.2 percent, -10.42 percent, 30.30 percent, -14.29 percent, -48.57 percent, 336.4 percent, 6.45 percent, 12 percent, and 483.3 percent. Over the same quarters, Pfizer’s revenue growth was: -15.49 percent, -15.85 percent, -8.66 percent, -6.65 percent, 2.74 percent, 3.84 percent, -3.78 percent, and -0.45 percent.

More importantly, did these numbers meet the street’s expectations? Let’s take a look at the last 4 quarterly earnings announcement reactions in order to gauge investor sentiment on Pfizer’s stock. The last 4 quarters have seen next trading session returns of 3.19 percent, -1.29 percent, 1.4 percent, and -0.53 percent. According to these reactions, investors have been mixed over the last 4 quarters but really liked the most recent numbers. A company who exceeds expectations generally performs well for the rest of the quarter.

E = Excellent Relative Performance Versus Peers and Sector

Pfizer stock has been steadily rising since its breakout in 2011 and has performed relatively well for a company of its size. As of today, Pfizer is showing a 3.47 percent return year-to-date. Its closest competitors, Merck (NYSE:MRK), Novartis (NYSE:NVS), Sanofi (NYSE:SNY), and industry are returning 2.88 percent, 8.27 percent, -2.63 percent, and 5.47 percent, respectively. So, Pfizer is by no means the leader, but it has done decently year-to-date.

Conclusion

Pfizer is a giant in its industry and it looks to capitalize on the increasing demand for healthcare. On the price chart, it broke out from a multi-year downtrend but looks to be pausing for a breather now. However, the simple moving averages are still indicating that a strong uptrend is intact. As seen in the options market, investors seems to be hedging their gains as order flow is showing a neutral to bearish stance. The most recent earnings and revenue growth figures have pleased investors, and it shows in their year-to-date performance. Relative to its peers, this large drug manufacturer is in the middle of the pack. Look for Pfizer stock to continue to OUTPERFORM.

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