Friday, December 31, 2010

A More-Selective "Dow Dogs" Strategem For 2011: Pick Pfizer, Over Merck

Here on the last NYSE trading afternoon of 2010, Seeking Alpha is hosting/running a piece authored by the folks who've written a treatise on Graham & Dodd investing -- at R.W. Wentworth & Co. The thesis is to choose "Dogs of the Dow" as pairs, then toss the lower performer, thus:

. . . .[W]e take a more reasoned approach by dividing the ten "Dog" stocks (as of December 30th) into pairs, and then selecting the more attractive of each pair. If we can beat the "Dogs" group itself, we have a better chance of beating the Dow as a whole, if 2011 turns out to be a year when the "Dogs" underperform. . .:
• AT&T, 5.86%, and Verizon, 5.48%. The former telecom is now trading "wide" (with a higher yield) than the latter. That is usually not the case, so we pick AT&T.

• Pfizer, 4.57%, and Merck. 4.22%. Again, the former pharmaceutical is trading "wide" of the latter. And after a 2009 cut, Pfizer's dividend is rebounding, and will likely "grow" back to over $1 a share, while Merck's has been constant for some years. So the gap between "yield on cost" will likely widen.

• Kraft, 3.68%, and Johnson & Johnson, 3.49%. Two "marketing" companies with similar yields (although rather different products). But JNJ has the better franchise longer term, provided its current problems don't destroy its "brand." This is reflected in the fact that JNJ's current yield is high relative to its history, and Kraft's isn't. . . .

Not much of a surprise here, as I've been making this point -- repeatedly -- for about six, erh thirty months, now. In any event, Happy New Year, one and all!


Anonymous said...

Merck ~12 PE ratio
Pfizer ~25 PE ratio

Do the math...

I don't think you need to concern yourselves with Pfizer going up.

Isn't Liptor off patent in 2011?

condor said...

First -- yes, Lipitor comes off patent in 2011 -- but that has been so completely vetted on Wall Street (and Main Street), that it is VERY likely fully-priced in at $17, on the NYSE. So, that would appear to be of little moment, now.

And actually -- if one is inclined to look at P/Es, one should look at the more RELEVANT P/E ratios -- Pfizer's forward P/E is more like 7.65; compare to Merck's forward P/E of 9.46 (per the Yahoo! stock boards). So -- Merck looks overpriced vis-a-vis Pfizer, on forward P/Es.

In fact, using the past P/E for Pfizer (as you have) is to expect that Lipitor's earnings will continue on in the future -- as they have in the past (@ ~$11 billion a year).

So, it is no wonder that the trailing P/E is where it is. The past earnings reflected Lipitor, and the Wyeth transaction. If you decide to use trailing P/E, in this case, you will be misled -- as to the future, with such a fundamental shift coming.

I'd also note that -- at anything under $17 -- Pfizer looks like a steal (even as we expect the disappearance of Lipitor earnings).

Merck at $36, OTOH, looks to be fully valued. Its forward P/E tells you so.

Namaste, and do stop back!