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Taking Stock: Drug stocks could give investors a lift

Malcolm Berko thinks drug stocks like Teva Pharmaceutical and Pfizer are worth holding.
By Malcolm Berko Published: December 22, 2013

Dear Mr. Berko: About two years ago, you gave a blanket recommendation for the drug company stocks because you said Obamacare would bring in of billions of dollars of new sales each year. So in October 2011, we invested $3,500 each in Lilly, Merck, Bristol Myers, Mylan, Teva and 250 shares of Pfizer at $20 because I use its Celebrex drug.

Today all those stocks, except Teva (which is disappointing), are up very much but Obamacare hasn't gotten off the ground. Do you think I should sell these stocks? We have a special interest in Pfizer because in addition to our 250 share purchase, my wife has 367 shares from when she used to work for them and Pfizer is our biggest investment.

RS: Jonesboro, Ark.

Dear RS: Teva Pharmaceutical (TEVA-$39.50), the world's largest generic drug company had some pipeline failures in its branded segment that clipped revenues, cut profits and chopped its stock performance. And pressing competition from low-cost manufacturers in India and China and the failure of its highly touted oral multiple sclerosis drug (Laquinimod) to meet Phase III trial goals, also cuffed TEVA's stock appreciation.

But TEVA's fall from grace in the last few years may be a good entry point for investors. The 3 percent yield is attractive, the dividend growth has been impressive, the shares trade at a low 8 times earnings, finances are rock strong and its vertically integrated operations, plus a new CEO, persuasively argue in favor of holding the stock as well as increasing your position. TEVA, which enjoyed an average price-earnings ratio of 22 before the recession clobbered the market, should reasonably trade at a P/E of 14 to 17. Some believe it can be a $75 stock in the coming three to four years.

Pfizer (PFE-$30.01), supposedly the world's second-largest pharmaceutical company, after spinning off Zoetis (ZTS-$31.32) its animal health care division, should have the “whole world in its arms.”

However, poor planning, an unexciting CEO who seems satisfied with the status quo, a sleepy board or directors, various patent expirations over the next few years (Celebrex, Viagra, Zyvox and Lyrica), and sluggishness of some of its franchised products (particularly Lipitor and Prevnar) don't augur well for PFE's future stock price. So the top line is likely to remain under pressure for the next 18 to 24 months.

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