Right now, it’s trading at a single-digit forward price-to-earnings ratio… Pfizer has been almost as cheap three times in history… and it always led to triple-digit gains.

Pfizer was almost this cheap at its bottom in 1979, and then it nearly doubled in two years. It was almost this cheap in 1984 as well… And once again, it nearly doubled in two years.

Last time, the stock got fairly cheap in 1989 (though not as quite cheap as ‘79 and ‘84) and it rose over tenfold during the 1990s. As the decade of the 1990s shows, when drug companies catch the public’s interest, they can go absolutely nuts.

I look for three things in an investment. I’d like the opportunity to be:

In the case of Pfizer, it is particularly cheap, based on any traditional measures of value. It is hated (or ignored)… the share price is down nearly 50% from 10 years ago.

But I don’t have the third leg of the stool… There’s no sign of an uptrend yet. Still, with the apparent value here and the poor performance over a decade, which has taken it off everyone’s radar screens, I thought it might be worth checking out. So I made a phone call to our medicine man…

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“Rob, as you know, I’m a medical nincompoop,” I started.

“But I’ve been running a lot of numbers this week, and it looks like the big drug companies – from pharma giant Pfizer to biotech giant Amgen – are the cheapest they’ve been in recorded history… They’re priced to basically never grow again, ever.”

Rob Fannon is half of our in-house medical investing team. Along with Dr. George Huang, Rob Fannon writes the S&A FDA Report and Phase 1 Investor.

This is how I typically work… I find an idea that might be appealing. And then I go out to my network of people and talk to someone who knows just about everything there is to know about that idea.

Since these drug stocks are so cheap, I hurled questions at Rob…

“Doesn’t Pfizer have some sort of legitimate moat? Doesn’t it have some advantages with distribution just due to its sheer size? And can’t it just sit back cherry-picking smaller companies that innovate and create new drugs? Ultimately, can it really NOT grow? Because that’s the way the shares are priced.”

Rob connected on every pitch…

“By law, Pfizer won’t be selling the same drugs 20 years from now – its patents will expire. So it must constantly ‘feed’ its drug pipeline. The problem is, its pipeline now is barren…

“And sure, it can buy smaller companies for their new drugs or technology… In fact, that’s the only way Pfizer has grown this decade… by acquisition. But the thing is, many other companies, including Amgen like you mentioned, are going after those same smaller companies.

“So can it NOT grow? Absolutely. Steve, Pfizer may appear cheap based on traditional measures as you say. But I wouldn’t buy the stock.“

Rob recommended taking the other side of the trade… looking for the smaller biotech companies that the Pfizers and Amgens will likely buy.

The new issue of my monthly newsletter, True Wealth, comes out later today. In it, Rob will share the best way to get exposure to the portion of the biotech sector he likes right now, in just one stock. Unlike Pfizer and Amgen, the uptrend is already underway… Time to buy!

Good investing,

Steve

Source: Big Drug Stocks: Cheaper Than They’ve Ever Been