Pfizer Inc. (NYSE:PFE) reported earnings this morning and PFE stock is down on the news.
Pfizer beat on the bottom line and boosts guidance. initial reaction in pre-market was muted, which typically is not a good sign. In my experience, if investors get what they expected (plus a lift in guidance) and the stock doesn’t rally, then it’s a bad sign. The only knock in statistics is that they barely met the top line.
Perhaps the general malaise that has recently fallen over the sector is to blame for this reaction in PFE. The iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB) has fallen 7% in about two weeks perhaps most influenced by combative remarks from President Trump vowing to continue fighting drug stocks and their management practices.
Although I offer this as a potential explanation for the “blah” response to PFE earnings, but not an excuse.
Fundamentally, and from an absolute perspective, PFE in not a screaming bargain at a price-earnings ratio of 26. Compare it, say, to Apple Inc. (NASDAQ:AAPL), which sells at a P/E under 20. But compared to its peers, PFE stock is relatively cheap and it pays a good dividend.
Technically, Pfizer stock has been boring for years. In the past 12 months, it’s only up 10% versus the IBB’s 20%-plus. Although there could be life ahead. If PFE can rise above $37.50 per share it could trigger a 20%-plus price breakout from there. The long-term price range is tightening and that suggests that a move is coming.
Today’s trade would benefit from such a breakout if it happens, but it won’t rely on it.
I use PFE options to sell downside risk against the naysayer fears for the next few months. Instead of buying the shares and hoping for a rally, I will bet that support will hold. And if it does then I would have created income out of thin air.
Analysts are mixed on PFE stock but overall they seem to be in a holding pattern. The good news is that their average price target is almost $40 and that plays perfectly into the technical upside potential I noted. The upper range on Wall Street is at $55 per share.
Click to Enlarge The rumor mill is always turning on PFE. Experts seem perpetually expecting management to announce a buyout of sorts. That fact keeps a bid under the stock which plays well into my strategy. I am betting on support to hold and the rumors are an integral part of this support.
The Trade: Sell PFE Jun 2018 $30 put and collect 65 cents per contract to open. This is a bullish trade which has an 80% theoretical odds of success.
But if Pfizer’s stock price falls below my strike then I accrue losses below $29.35.
Selling naked puts carries a huge risk. Those who want to mitigate some of it can sell a spread instead.
The Alternate Trade: Sell the PFE Jun 2108 $31/$29 bull put spread where I can yield 15% on risk.
Compare this with me risking $35 here to buy the PFE shares then hope for a rally to profit. In either of my setups, I can still retain maximum gains even if PFE falls another 10% from here.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
