We have a slew of headline risk, from global tariff wars to political unrest. So these are nervous equity markets with elevated levels of uncertainty. Consequently, even great earnings reports have not been reasons enough for the bulls to maintain earnings rallies.
Pfizer Inc. (NYSE:PFE) reported earnings this morning, and while they met the bottom-line mark, they missed on revenues. And in a quarter where even flawless reports have failed to spark a sustainable rally, missing on any metric is cause to sell the stock. Investors don’t want to see a company make its profits by P&L financial engineering, they want to see actual results.
I rarely expect PFE stock to be the most exciting, but I can count on its management to be consistent. This report they delivered is proof of it since they will be able to deliver a yawner almost in any environment. Boring makes for an opportunity to create income in a relatively easy way.
I don’t expect fireworks to fuel massive rallies in Pfizer stock, but I can count on support to hold through 2018.
Fundamentally PFE is cheap. It sells at a price-to-earnings ratio of 21 on a trailing basis. This is a fraction of many of its competitors like Merck & Co., Inc.(NYSE:MRK), Bristol-Myers Squibb Co (NYSE:BMY) and Eli Lilly and Co (NYSE:LLY). So there is tangible value there. To take the point further, price-to-book is barely over 3, so owning Pfizer shares in the long run at these levels is not likely to be a major financial debacle.
Technically, PFE came into this earnings report sitting at a pivot level that dates back decades. In April of 2002, it started a correction that took it from $37 per share to $12. It has since recovered and now even after this morning’s dip, sits within 1$ of $37.
The longer the recovery period, usually the bigger breakout from the scene of the accident. In this case, it took Pfizer over a decade to come back to the neckline. So if the bulls can maintain the trend of higher lows knocking on the $37 per share area then they can overshoot higher and perhaps reach for $42 or higher. But this also creates risk from losing the trend line.
Click to Enlarge But today and in this edgy equity market, I prefer betting on downside support holding rather than chasing upside hopium. I can trust that if PFE corrects hard then I’d be a stronger long then at lower levels.
So I will use options to generate income from Pfizer stock with no immediate out-of-pocket expense. In return and only if prices fall hard, I will own shares of Pfizer at a 15% discount from current price.
PFE Stock Trade Ideas
The Trade: Sell the PFE Jan 2019 $30 put for 60 cents. Here I have a 85% theoretical chance of success. Otherwise and if the price falls below that level then I would suffer losses below $29.40.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the PFE Jan 2019 $31/$29 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 20% if successful.
Click here to see how this trade fits within the macroeconomic picture and for an ongoing free copy of my recap.
Learn how to generate income from options 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.
