Clients are asking if we should buy Pfizer

Pfizer announced that its vaccine candidate was found to be more than 90% effective. The test population were participants without evidence of prior SARS-CoV-2 infection. The announcement caused the S&P 500 to open 3.8% higher Monday morning. PFE rose around 15% at the open before closing Monday with a gain of 7.7%. PFE has 5.5 billion shares outstanding. The stock rose 2.80 on Monday, adding $15.5 billion to Pfizer’s market cap. The vaccine is in phase-3 of its drug trial. A high percentage of vaccines fail in either phase-3 or phase-4. Even if it does make it to market, the vaccine is unlikely to generate sufficient cash flow to warrant the increase in market cap. Competition from other vaccines is certain. There are two more vaccines in trials that are promising and could still beat Pfizer to market.

I received a text Monday morning from a client asking if we should buy Pfizer. A second text from a different client soon followed. They both felt that PFE might be worth owning given the positive vaccine news. I texted back that I would look at PFE. I did not agree to look because of the vaccine news. It was already priced into the stock (and then some). An investor buying a stock should only do so if they expect to earn an above market, risk-adjusted return. Otherwise buy the market, which is your default equity investment. News that causes a stock to jump only adds additional return if you buy the stock before it jumps. Once the price has adjusted to the news, there is no reason to buy because there is no excess return left to capture. The stock has already priced it in.



I did look at PFE as a possible buy. It did not pass our valuation process or meet our requirements for ownership. We do not look at one stock in isolation. In this case, we looked at a few other pharmaceutical companies as well. It turns out that we might buy a pharmaceutical company in the next few months. It just won’t be Pfizer.

Regards, 

Christopher R Norwood, CFA

Chief Market Strategist