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January 10, 2005

Pfizer Redux

Being traders, we frequently look back at what has just happened so that we do not turn into salt in the future. On December 17, discussed Pfizer’s panic day, and we stated that the premise for the drop was pure rubbish. Being near the end of a quarter (and year), we expected money managers to exercise yet another episode of CYA rather than look after the best interests of their customers. We predicted 2-3 days of grudging selling pressure, followed by a quick rally once the house cleaning was done. What we saw, in fact, was 2 days of grudging selling followed by a quick rally once the house cleaning as done. Pfizer rallied nearly 10% in a span of three days and has since gone sideways.

I still hold that Pfizer’s long-term perspectives are much greater than what the market is pricing at this time. The drug sector simply has a lot of extra risk priced in right now, and the key to trading will be to try to identify events that will tip the sector back into favor.

From a technical standpoint, Pfizer appears firmly entrenched in its neat downtrend that began in February of last year, although it looked to be attempting a break-out just before the Celebrex fiasco. From a fundamental standpoint, the stock is now priced at a very reasonable 3-times sales and yields just under 3%. Psychologically, the drug sector is still under pressure, but this pressure is concentrated on Merck and Pfizer. Other druggies like Schering-Plough and Glaxo began rallies in the late summer that have sustained. Given the convergence of these factors, we believe an entry point for a longer term opportunity in Pfizer may approaching.

As for equities in general, the market seems to be stuck in its own version of the movie, “Ground Hog’s Day”… yet another morning rally fizzled, though the market did hold positive ground on the strength of housing and some tech stocks. It’s usually not very prudent to put too much emphasis on one day’s action. What’s more telling is how the market has behaved all year (yes, all 6 trading days of it). We have seen the largest first-week sell-off in 14 years in combination with a rare net outflow from mutual funds. Are people getting strapped? Let’s wait and see.

Author’s disclosure: No positions.


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