Most stocks continue to trade far below their 52-week highs, but that’s not the case with Eli Lilly (NYSE:LLY). LLY stock now trades higher than when markets were at their peak.
So, why is this big pharma name performing so well? Many factors have helped support its stock price. But the novel coronavirus may be the catalyst driving shares to new highs.
Partnering with the National Institute of Allergy and Infection Diseases (NIAID), they are exploring whether their Olumiant (barictinib) rheumatoid arthritis treatment can be used to treat those hospitalized with coronavirus.
With this catalyst in motion, the recent price action should be no surprise. But, does that mean you should hop on the bandwagon? Not so fast! The company has many factors in its favor. Yet, the recent strong performance means shares trade at a premium to peers. In other words, Eli Lilly’s share price may already reflect these positives.
Also, LLY stock isn’t the only high-quality big pharma stock out there. Other names may offer similar positives but at a more reasonable valuation. With this in mind, chasing this “hot stock” doesn’t look so hot.
LLY Stock and Coronavirus
Does Eli Lilly have a shot at solving the coronavirus pandemic? Let’s not put the cart before the horse, but the company may have a viable treatment on its hands.
So, what are the details? The company is participating in the NIAID’s Adaptive Covid-19 Treatment Trial. In this study, NIAID is testing Lilly’s Olumiant, along with Gilead’s (NASDAQ:GILD) remdesivir, on very ill coronavirus patients.
Treatments begin in late April, with results expected by late June. The company is also conducting trials for another potential treatment, LY3127804. The game plan with this trial is to see whether this treatment diminishes the need for respirators.
LLY stock was already trending higher. But this news pushed shares above their February high-water mark. Could this catalyst mean the rally continues?
I’m skeptical. Investors keep trying to find a trade within this pandemic. That explains why “hot stocks” like Moderna (NASDAQ:MRNA) have become overvalued. Is the same thing happening with Eli Lilly? I wouldn’t say shares are selling at a sky-high valuation, but I do find the stock’s valuation to rivals a big concern.
In short, recent moves higher may not be sustainable. I don’t see shares crashing down. But soon enough, the stock could be trading closer to its peers.
Valuation Top Concern With Eli Lilly Shares
Competitors like Merck (NYSE:MRK), Bristol-Myers Squibb (NYSE:BMY), and Johnson & Johnson (NYSE:JNJ) trade at forward price-to-earnings (P/E) multiples below 20. But LLY stock currently commands a forward multiple of 21.5.
So, what does that mean for shares going forward? Either its rivals catch up, or Eli Lilly reverts to the mean. Yes, there’s good reason why shares have outperformed. Morgan Stanley’s David Risinger highlighted them in a recent research note.
These include more of its revenue coming from outpatient drugs, a reaffirmation of 2020 guidance, and less dependency on new drug launches. In other words, many positives at play with LLY stock.
But like myself, Risinger thinks shares have become overvalued due to this optimism. He cites massive unemployment post-pandemic as a risk that could impact 2021 sales. With shares now “priced to perfection,” any sort of stumble could push the stock back to lower levels.
In my mind, it may be better to consider more reasonably priced big pharma stocks. InvestorPlace’s Dana Blankenhorn discussed one of them on April 15: Johnson & Johnson. In his view, that company’s shares could be a safe harbor in today’s uncertain market.
But not only does JNJ stock come with a coronavirus catalyst, solid financials, and a strong economic moat. Its shares trade for just 17.3 times forward earnings. In short, better value than Eli Lilly stock.
Bottom Line: Don’t Chase “Too Hot to Touch” LLY Stock
Eli Lilly may be in a better position relative to its big pharma peers. But the stock’s current price already reflects these positives. With its coronavirus catalyst pushing shares higher, now is not the time to chase this “too hot to touch” name.
Instead, consider pharma names selling at lower valuations than LLY stock. These may offer similar potential for gains, and at more reasonable valuations.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
