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Are We Saps? Getting In On Pfizer’s YTD 7% Gain, But Missing the 101% Run-Up Post-Crash

Individual investors, we keep reading, are rushing back into stocks, putting the S&P 500 Index up 3% so far on 2013 and a fistful of widely-held stocks up a good deal more than that.

Yesterday, we noted the advance in Chevron (CVX) shares and wondered, unkindly, “Are the saps getting back into the stock market.” We wouldn’t sound so harsh, but history – including very recent history – tells us that individual investors tend to do the opposite of what Warren Buffett recommends: be greedy (buy) when others are fearful and be fearful (sell) when others are greedy. Instead, we amateurs tend to sell after a crash and then wait to buy back in until stocks have rallied.

So, those who bought Pfizer (PFE) to start off the year have had a lovely bounce, but if they’d bought at the nadir in March 2009 they’d have enjoyed a stupendous gain, as seen in a stock chart.

PFE Chart

PFE data by YCharts

Pharmaceutical stocks are among the most widely held companies in individual investors’ portfolios – they can be great dividend players and their sales tend to hold up well in tough markets. So it is hardly surprising that, as a group, they have generally kept pace with the S&P 500 index since the market trough of early 2009. That is why we’re digging into this sector in the second part of our short series of articles focusing on some of those widely owned publicly-traded U.S. companies, those that are helping to propel major market indexes sharply higher this year.

True, big pharma has tended to lag a bit, thanks in part to the struggles that some members of the group have had in maintaining a pipeline of potential blockbuster drugs, even as their existing ones lose patent protection. Pfizer, in spite of the fact that Lipitor has come off patent, has been a major contributor to the nascent Bull Market of early 2013.

^SPX Chart

^SPX data by YCharts

Putting the huge post-crash run-up aside, is the 2013 rally, which has taken Pfizer’s stock up nearly 7%, more than double the year-to-date gain in the S&P 500 of 3.11%, justified?

The company’s fourth-quarter earnings, released yesterday, shed some light on this question, but likely not enough for anyone to base an ultimate decision. Revenues dipped 7% -- but that was because of Lipitor, and the dip had largely been priced into Pfizer’s share price, leaving it free to climb 3% immediately after the results were released yesterday morning in response to better-than expected earnings.

Importantly, Pfizer appears to have done a good job restructuring and cutting costs. In the fourth quarter, it saw a big one-time gain on its $11.5 billion sale of its nutritional business to Nestle and looming on the horizon is the IPO of its animal health division, Zoetis, due to hit the market on Friday. Harder to gauge is what lies ahead in the way of new drugs – the lifeblood of any pharmaceutical company. The Food & Drug Administration gave the go-ahead for Pfizer to launch Xeljanz, a rheumatoid arthritis treatment, late last year, and Eliquis, an anti-clotting agent that Pfizer developed jointly with Bristol-Myers Squibb (BMY) also won approval. Both have the potential to be blockbusters, pulling in billions of dollars a year in sales.

PFE Dividend Chart

PFE Dividend data by YCharts

Just as significantly for many Pfizer investors, the company has done a good job at generating value as well as growth. The company’s dividend yield – even after its price gains and a small but steady increase in the dividend itself since 2010 – now stands at an impressive 3.6%. The PE ratio is about 14. The company has resumed its buyback activity, particularly aggressive in the early part of 2012.

Pfizer still has all the hallmarks of a value stock, if not a deep value bargain: earnings growth; a management team willing to emphasize returning cash to shareholders and focus on both strategic issues and rationalizing the business’s current structure. The wild card is the product pipeline, and with the recent FDA approvals (which also include two new cancer drugs) Pfizer seems as if it is reasonably well positioned to do well here, too, even if the new drugs won’t be enough to fully replace the loss of Lipitor. It isn’t often that you find a stock with such a rich yield that doesn’t have obvious blemishes; in their absence, this may be one of those contributors to the current rally that is gaining based on solid fundamentals and not simply broadly-based market exuberance.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.

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