(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Pfizer Inc. (PFE) shares have dramatically underperformed during the past three years, rising 9.4% compared to the S&P 500's rise of nearly 31%. But the pharmaceutical company now appears to be poised to rise 10% in the coming weeks, based on technical analysis. Options traders are also betting the stock will gain in the next few months.
Pfizer has not only underperformed the broader stock market, but its valuation is among the cheapest of some of the other big pharmaceuticals. Shares of Pfizer are trading at just 11.9 times 2019 earnings estimates, well below that of the S&P 500 and companies like Merck & Co. Inc. (MRK), Johnson & Johnson (JNJ), and Bristol-Myers Squibb Co. (BMY).
The technical chart illustrates why the stock may be about to jump due to two bullish technical patterns. The first is a short-term symmetrical triangle and the second is a longer-term ascending triangle. Both indicate the stock is poised to rise in the coming weeks, with shares ready to clear a critical technical support price at $37. It may result in the stock soaring by about 10% to $40.50.
The relative strength index (RSI) also suggests shares of the stock may be poised to rise as well. The RSI has been trending higher, and like the stock price, a bullish symmetrical triangle pattern has developed as well.
The options are also suggesting the stock may rise by the middle of September, increasing by about 5% to $38.40. The open interest has been steadily growing for the $38 calls set to expire on Sept. 21 to nearly 27,000 open contracts.
Pfizer's stock trades at about 11.9 times 2019 earnings estimates of $3.08 per share, making it cheaper than the S&P 500 one-year forward P/E of about 16.6. Additionally, it trades at the lowest price to earnings (P/E) multiple when compared to its peers. Pfizer's valuation has been the weakest among its peers over the past year.
Part of the reason for the low earnings multiple is a lack of longer-term earnings growth. Although Pfizer is expected to post robust earnings growth in 2018 of 11.3%, that growth is likely to slow to roughly 4% over the next two years.
At this point, Pfizer’s cheap valuation maybe enough to lift shares over the short term, but a sustainable rally will need a shot of solid longer-term earnings and revenue growth.
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.