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For most of the past year, the Tech Wreck battered computer
and telecom stocks but left other growth sectors almost
untouched. Some, such as pharmaceuticals, actually bucked
the downward trend as investors shifted money into growth
stocks that seemed able to hit their earnings targets. Over
the past month, though, even stocks that had been holding
up have come under attack, because professional investors
have had to sell blue chips to meet margin calls and mutual
fund redemptions. As a result, most growth stocks have sold
off together.
This broad decline has created some great deals, and
nowhere are the opportunities more compelling than among
top pharmaceuticals. Drug stocks were cheap in the early
1990s, when Hillary Clinton's health-care initiatives
raised fears of some sort of price controls. But once
Hillarycare went down to defeat, drug stocks rebounded.
Then as growth and momentum increasingly became the
dominant investing styles, big pharma rose to extremely
expensive valuations.
To some extent, high prices are justifiable for drug
stocks, which enjoy profit growth significantly higher than
that of the overall economy. Not only is the industry is in
the midst of a technological revolution, but it's also a
prime beneficiary of unmistakable demographic trends. As
more and more baby boomers enter their fifties, they
constitute a steadily growing market for drugs, which are
often the cheapest and most effective way to treat the
chronic illnesses of aging.
The typical drug company manages profit growth of about 16
percent a year. And those increases tend to be fairly
consistent unless a company has lots of important drugs
coming off patent and a weak pipeline of new products. As a
result, over much of the past five years, shares of big
drug companies have traded at premiums more than 30 percent
above the S&P 500. In the past month, though, those
premiums have been reduced to only 15 percent or so.
When P/Es are depressed, it makes sense to buy shares of
the best companies in an industry. And in the case of
pharmaceuticals, that means
Pfizer.
The company has half a dozen blockbuster drugs, including
cholesterol-lowering Lipitor, not to mention Viagra. The company has
another half dozen potential winners expected by 2002 --
and an additional half dozen targeted for 2004. So Pfizer
has none of the pipeline worries that could undermine some
of its competitors.
Earnings could get an extra boost from the ongoing
integration of Warner-Lambert, which merged with Pfizer in
June 2000. Not only did Warner-Lambert bring some winning
drugs, but the merger is allowing for substantial cost-cutting.
Altogether, Pfizer is projected to grow earnings
nearly 25 percent annually over the next five years.
At its peak last year, Pfizer traded at a 47 P/E. Since
then, the share price has fallen by more than 20 percent to
just under $39. The result is that even though Pfizer's
outlook is better than ever, the stock now trades at a
level that investors haven't seen since 1998.
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