Beaten-up guru-favorite Pfizer (NYSE:PFE) shares could be a profitable investment in an industry that is currently out-of-favor – a classic Contrarian play. Big pharmaceutical companies have been out-of-favor due to lawsuits (e.g. Merck’s (NYSE:MRK) Vioxx mess), patent expirations, and few new blockbuster drugs in the pipeline.
Pfizer’s share price (PFE, $25) is currently trading 40% below its five-year high. For Contrarian investors, unpopular stocks are opportunities. The Contrarian Investing Association has a target price of $30 on Pfizer’s shares. We think that Pfizer, with its 4% dividend yield and historically attractive price, offers a unique Contrarian opportunity.
We look for three indicators when analyzing a Stock to Study:
1) Out-of-favor with the Crowd – but liked by Gurus
2) Trading below Intrinsic Value
3) Strong Free Cash Flow
Vital Few versus the Trivial Many
The Trivial Many are the masses that follow the crowd and let emotion guide their decision making process. Members of this herd include Wall Street analysts, journalists, and lemming-like investors. In contrast, the Vital Few are the real doers – the ones that consistently beat the markets by going against the crowd. The vast majority of the Trivial Many are bearish on Pfizer (over 70% have a hold or sell rating according to Yahoo! Finance).
What are the Vital Few doing? They are buying Pfizer! Currently, 14 gurus hold Pfizer – a good indicator of where the smart money is going. If the Vital Few are buying Pfizer, they likely know something that the herd doesn’t. A good source of information is GuruFocus, which tracks the holdings of Gurus like David Dreman, Charles Brandes, Martin Whitman, and George Soros - all holders of Pfizer by the way. Valuation Matters: The legendary value investor Benjamin Graham said it the best, "In the short run the market is a voting machine; in the long run it is a weighing machine."
The intrinsic (i.e. long run) value of Pfizer is likely far greater than its current market value. The broker independent Morningstar analysts give Pfizer a fair value estimate of $29. In their analysis, Pfizer trades about 15% below its intrinsic value.
Cash Is King
Looking at the numbers, Pfizer is a free cash flow machine. With 13 billion dollars of cash/short-term investments on its balance sheet, it generates large amounts of free-cash-flow a year.
Finding the right company at the right price (when the crowd is looking elsewhere) is a Contrarian’s dream. People get sick and will continue to get sick into the foreseeable future. Pfizer has developed drugs and is still developing new drugs to replace its aging pipeline. It currently has cancer, diabetes, and obesity drugs in development – all potential block-busters to solve common human problems (big market demand). When Pfizer eventually becomes popular again, smart Contrarian’s may profit. Guru favorite Pfizer may be what the doctor ordered.
Disclosure: The Contrarian Investing Association currently advises Pfizer to its members as a Stock to Study.
PFE 1-yr chart