Pfizer (PFE) is the hot stock at the moment with a reverse merger with Allergan (AGN) going ahead and a possible split of the combined behemoth in a couple of years’ time.
A 10% recent stock price drop has allowed Pfizer to come on the radar for a short term quick trade or even a longer term investment.
Please note, I am both a long-term deep value investor as well as a medium-term trader who utilizes the combination of both fundamental and technical analysis to form a view of every investment I make. Doing so I believe leads to low risk and superior market beating returns over the long run.
Fundamental Factors
The Bad
Earnings per Share growth (EPS) has been weak over the past several years, but the merger with Allergan will likely resolve this with new higher margin patented products added into the mix as well the tax inversion benefits of relocating to Irelands’ lower tax environment.
The Good
Valuation of $30 (approx.) based on adjusted discounted cash flow analysis, so Pfizer is at fair value at current prices.
Cash flow conversion from earnings is strong.
Earnings per Share growth (EPS) is forecasted
Normalised Return on Equity (ROE) of just over 13.5% is satisfactory.
Net Debt to Equity (D/E) is low at just 27%.
Technical Factors
The Bad
Clearly broken the $33 key price support levels.
Currently below both 50 and 200 day moving averages.
The Good
Strong $31 price support seems to be holding
The stock is oversold on a variety of momentum indicators, primarily driven by the recent uncertainty of the reverse Allergan merger
Other Factors
For longer-term investments, I generally like to see who else is on-board with me and where the smart money has found its home.
In my opinion, actions always speak louder than words.
In this case, SEC filings report the following world-renowned deep value investors holding significant stakes in Pfizer.
Kahn Brothers – 9.72% of portfolio managed
Robert Bruce – 4.12% of portfolio managed
Lee Ainslie – 3.73% of portfolio managed
Conclusion
PFE is currently at fair value and temporarily out of favour but it is a fundamentally strong company with monopolistic characteristics and smart money support, including the famous Kahn Brothers.
I have just added PFE into our short term trading portfolio as there is significant buying volume picking up.
To see how you can easily identify undervalued leading stocks like Pfizer yourself, click here.
