(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Pfizer Inc's (PFE) stock has surged higher by more than 16% in 2018. Now technical analysis indicates shares may be due to fall by about 10%. The stock had rocketed higher starting at the end of July when the drug-maker posted better-than-expected quarterly results and provided better-than-expected full-year guidance.
The technical chart shows Pfizer's stock breaking out at the start of July when it increased above technical resistance at $37 and has risen by more than 13% since. Now shares are bumping up against a resistance level around $42, that goes back for nearly two decades to late 2001, and that may prove difficult for the stock to rise above. Should shares fall, technical support sits around $38.
Another bearish warning, the stock is now well into overbought territory as measured by the relative strength index (RSI). The index reached a high of more than 80 on July 30, its highest level in over a decade. With the RSI level at such an extreme high, it suggests that Pfizer's stock may be wildly overbought. Another warning sign, the RSI has now started trending lower, despite the stock continuing to rise, a bearish divergence signal, also suggesting shares are due to fall.
Volume levels are also starting to sink as shares continue to surge higher, and that suggests that either the number of buyers are beginning to thin out or that the stock is merely rising on the absence of sellers.
While analysts are looking for robust earnings growth out of Pfizer in 2018 of nearly 13%, that growth is expected to fall dramatically in 2019 and 2020 to just 3%. Meanwhile, revenue is seen rising by only 3% in 2018, falling to just 2% in 2019, and near flat in 2020. Additionally, shares of the stock aren't cheap based on its P/E ratio of 13.6 times 2019 earnings estimates. Today's valuation is the highest the stock has seen since the middle of 2016.
Pfizer's stock has been on a big run higher since the end of July—and perhaps deservingly. But for shares to continue moving up they will need to keep delivering better-than-expected results, or else the recent rally may melt away.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.