Pharmaceutical giants highlight a heavy week of first quarter earnings, with Dow components Merck and Co., Inc. (MRK) and Pfizer Inc. (PFE) posting results in Tuesday's pre-market. Both stocks have lifted through the Dow's performance ranks in recent weeks, with rising relative strength underpinned by steep declines in other components rather than sustained rotations into these slow-moving instruments.
Of course, segments of the drug sector are booming these days, with coronavirus research and trials attracting the attention and capital of speculators. These mega-companies are also getting into the act, with Pfizer receiving German approval to start trials on BioNTech's BNT162 vaccine, a jointly developed project. And just last week, Merck announced a research collaboration with the Institute for Systems Biology (ISB) that will examine the molecular mechanism of the virus and "identify targets for medicines and vaccines."
Wall Street analysts are looking for Merck to post earnings per share (EPS) $1.34 on first quarter 2020 revenue of $11.46. The stock sold off after February's fourth quarter 2019 report, ahead of a steeper decline that found support at an 18-month low in March. Pfizer is expected to deliver first quarter 2020 EPS of $0.71 on revenue of $11.35 billion after a poorly received January report triggered a 5% one-day downdraft, followed by a somersault that ended at a five-year low in the upper $20s.
Merck stock acted like a tech high-flyer in the 1990s, gaining ground in a historic uptrend that stalled in the low $80s in 1999. A failed 2000 breakout posted an all-time high at $96.69 before rolling over in a double top breakdown and long-term downtrend that posted lower lows and lower highs into March 2009, when Merck shares bottomed out at a 14-year low near $20. The subsequent bounce completed a round trip into the 2008 high in 2014, but it took another four years to confirm a breakout.
The rally into 2019 stalled within four points of 20-year resistance at year end, yielding a reversal, followed by a decline that picked up steam in the second half of February. The sell-off tested support at the 50-month exponential moving average (EMA) and .382 Fibonacci sell-off retracement level, bouncing strongly into April. The uptick has now stalled at 200-day exponential moving average (EMA) resistance at $82, which was broken on heavy volume in February, predicting a pullback that could test the prior low. In the meantime, the 3.02% dividend should help disappointed shareholders sleep at night.
Pfizer shares posted fabulous gains in the 1990s as well, underpinned by Viagra's huge commercial success. The stock hit an all-time high at $50.04 in April 1999 and settled into a narrow range, ahead of a failed 2000 breakout attempt. The subsequent decline marked the start of a multi-year downtrend that finally ended at 12-year low in the lower teens in March 2009. The stock turned higher into the new decade, easing into a rising channel that persisted into 2014.
The uptrend mounted the 50% sell-off retracement level at that time and entered a less vertical trajectory that generated mediocre upside into July 2018, when the stock took off in a strong advance. The uptick stalled less than four points below the 1999 peak in December, giving way to a persistent downtick that continued into March 2020, when the stock posted the lowest low since October 2014.
The sell-off found support at the 50% retracement level and 200-month EMA, marking the first test at the moving average since 2012. It will be tough for bears to break this durable trading floor, so long-term investors may wish to pull up a chair and watch for buying signals that could yield decent upside. Even so, the 4.14% dividend will likely provide most of the profit potential for this traditionally slow mover.
The Bottom Line
Pfizer stock appears well positioned to post respectable 12- to 18-month gains, while Dow rival Merck could test and potentially break March's deep low.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.