My short term sentiment on the market, is being bullish on blue chip stocks that pay over a 4% dividend. Since December 14 the Dow Jones Industrial average is up 659 points. Blue Chips that pay over a 4% dividend such as General Electric (GE), AT&T (T) and Altria (MO) are stocks that I have made option plays on that have been profitable. The Blue chip stocks (in the last sentence) can be traded in a variety of market conditions and these stocks are generally market leaders, have positive fundamentals and don't have large up or down price movements. Large price movements can also lead to faster profits, but also greater losses. When looking around for other stocks that fit into my thesis, "being bullish on blue chip stocks that pay over a 4% dividend" I came across Pfizer (PFE).
Pfizer is a Dow 30 component that is a Biopharmaceutical company in the healthcare sector. Lately, there has been articles on how Pfizer will grow despite the loss of patent expiration Lipitor. There's a good article written by Investment Underground Seeking Alpha contributor Kathleen Martin mentions how Pfizer can still continue to grow by shifting their strategies. One point in the article that gave me a bullish conviction on Pfizer is, "Pfizer's strategy to purchase the development portfolio of other pharmaceutical concerns is an appropriate strategy as expenditures on research and development can cripple a pharmaceutical company". This strategy of buying smaller companies with products that can lead to profits is nothing new for companies that have the cash and market cap like Pfizer. This strategy can lead to fewer costs since the research and development has already been started.
Since the news about Lipitor in November, Pfizer dropped to a three month low of $18.45 Ever since then Pfizer has been in a bullish channel upward and is currently up $3.32 or 18% If investors believe that Pfizer can still can continue to grow revenue and profits despite the loss of key patents, then here is an options play on Pfizer.
Bullish call strategy on Pfizer: Buy ITM calls
Buy April 21, 2012 19 strike calls
Cost of 1 call= $286
Breakeven= 19 + 2.86= 21.86 (21.86-21.78=0.08)
One of my favorite strategies to use options on is what I call the low breakeven trade. I enjoy low breakeven trades since I only need a small movement in the price of the stock to profit on. I prefer to use this strategy on blue chip stocks that pay a 4% dividend or greater, are market leaders, have positive fundamentals and don't have large up or down price movements. Pfizer is also a nice defensive stock to have in an investor's portfolio.
While there are a variety of strategies to use options on stocks, I believe that buying calls is an easy play that can produce profits if the stock has a small climb upward. Investors should also consider selling calls on shares as another easy play. In the short term I'm looking for Pfizer to go north of $22 and make this the next foundation for support. In the last three months there have been no analyst sell recommendations on Pfizer and Credit Suisse has a $23 price target on Pfizer. When technically looking at a one year chart of Pfizer investors will notice Pfizer is above the 50, 100 and 200 day moving averages.
If Pfizer can continue to grow revenue and profits by going lean and mean then look for the upside to continue as this strategy has worked well for other U.S. companies. Also, you never know when the next big drug discovery will be around the corner. Thank you for reading and Good Luck!