Two New Dogs To Watch: Citigroup, Pfizer

It's almost time for the annual reshuffling of the Dogs of the Dow. In particular, I have my eye on Citigroup (C) and Pfizer (PFE). These guys have been beaten down too far. While there is definitely valid reasons for the downside pressure in both companies, you have to begin to think that most of the bad news is priced in. Obviously, Citi would carry more uncertainty and risk considering the uncertainty that lies ahead (further writedowns, etc.).

However, both stocks have impressive yields (a requirement to be a Dog), at 6% for C and 5% for PFE. You would think that Pfizer would stand-up better if this recession that every one talks about comes to fruition.

Of the two, I like PFE the most as I think the risk/reward is better, especially considering the current market sentiment (Financials = Bad, Staples = Good). They've been cutting costs (and employees) to make up for their weak pipeline and dimenishing sales, especially in their #1 drug Lipitor. This is still a solid company with lots of cash. I can definitely see them pursuing some acquisitions in the near future (probably biotech, no big surprise there) which would most likely cause the stock to rally in the near-term.

I'm still just watching both of these, but obviously think we are near a bottom in both, similar to how I generally feel about this correction in general (that is just that, a correction, not a recession). However, I'm not going to make a move until the trend shows some solid signs of reversing. If I do buy, it would likely be next week or early December after watching how the market is acting and to see if this pullback continues. My hunch is that it will not, and that today will probably end up being a great entry point in hindsight, but I'm willing to wait to see if the market can turn the corner first instead of trying to catch the proverbial falling knife.

Also, I'd probably prefer to attack this as a trade using deep in the money calls about 2 or 3 months out as opposed to owning the stock outright. Better risk/reward, especially if you believe we're near the bottom. Right now, the PFE JAN 20.0 calls basically have little time premium in them, priced at $2.85 with the stock currently trading at $22.56. You have two months to get above $22.85 to break-even. I think it could be back at $25.00 by then which would be a quick 75% return.

Disclosure: none

Comments

[Creative In...:]

I definitely agree with you here. I have not looked at Pfizer much, but Citi is looking very attractive right now: actual dividend yield is about 6.7%. But I'm also in the waiting mode - until after the Dec 11th Fed meeting, which will let us know whether the correction will turn into recession or not. Fed has previously expressed sentiment in regard to the markets still being "bad", but they don't want to make any more cuts. If they don't make any rate cuts on Dec 11th, that will be bad, very very bad.

My blog: Creative Investor 101

2007 Nov 22 10:53 AM