Why Is Wall Street Bullish on These 3 Stocks?

Rising institutional ownership combined with a low short interest are probably a couple of good signs that Wall Street thinks a stock has strong upside potential. Even so, it's not always entirely clear why the Street is bullish on a particular company.

AbbVie (NYSE: ABBV  ) , Allergan (NYSE: AGN  ) , and Pfizer (NYSE: PFE  ) are three large pharma companies that have seen institutions increase their stake lately, but have also attracted minimal interest from short sellers. Nonetheless, Allergan is the only stock that has made a big move upwards this year, with both AbbVie and Pfizer lagging behind many of their peers in terms of performance. With this in mind, let's look at why Wall Street is bullish on these three pharma stocks and consider their growth prospects moving forward. 

PFE Chart

PFE data by YCharts

AbbVie has two upcoming catalysts
AbbVie's courtship of Irish biopharma Shire (NASDAQ: SHPG  ) has grabbed headlines lately, especially now that a deal looks imminent. Specifically, Shire is reportedly willing to accept AbbVie's latest offer of roughly $54 billion. In my view, AbbVie is getting a steal at this price.

Based on my conservative estimates for tax savings alone, AbbVie will probably recoup its purchase price within 20 years. On top of that, AbbVie will gain a lucrative pipeline of orphan and non-orphan drugs that could nearly doubly AbbVie's pharma sales by 2020. In short, this deal is a big win for AbbVie.

AbbVie is also likely to gain regulatory approvals in the EU and U.S. for its powerful hepatitis C therapy. If all goes as planned, the drug could be available on both continents by the first quarter of 2015. Although it's difficult to say how well the drug will perform compared with other available treatments, I think it will easily add 10% to the company's top line next year, if approved.   

Allergan's move upward is all about Valeant's relentless takeover pursuit
Anyone watching the health-care sector these days has probably heard that Valeant Pharmaceuticals (NYSE: VRX  ) and Allergan's activist hedge fund shareholders are pushing for a merger. Now that Valeant is taking the offer directly to Allergan's shareholder base over management's objections, we have clearly moved into a hostile phase of this deal.

Allergan's management is seeking a deal of its own to avoid a takeover, but their options appear even more limited now that Shire is showing interest in AbbVie's latest offer. As it stands, I think Allergan's market cap is close to where a final deal will be inked, and investors jumping in now risk a major reversal if Allergan can somehow table this merger.

Pfizer's value to be unlocked by a reorganization
Pfizer's management has been talking about reorganizing the company to "unlock value" for the past few years. And if its unable to rekindle the failed deal with AstraZeneca, we are likely to finally see this plan go into action before year's end. 

What's important to understand is that Pfizer doesn't have enough firepower in its clinical pipeline, aside from bococizumab and palbociclib, to replace its host of blockbusters coming off of patent protection. Next year, for instance, Pfizer is expected to post an anemic growth rate in terms of earnings per share of less than 1%. 

A deal with AstraZeneca would help the company in terms of its bottom line, but it would also give Pfizer a much-needed infusion of talent on the clinical side. By contrast, a restructuring effort would allow the company to rid itself of underperforming former blockbusters and create a new unit of recently launched products. In short, Wall Street thinks Pfizer has a couple of cards to play to generate growth and that it will do so in the near future in some way, shape, or form.

Foolish wrap-up
I think the interest from Wall Street in these three pharmas is justified from either a catalyst or a valuation perspective, depending on the case. That being said, AbbVie looks like it has the most to offer in terms of upside going forward. Pfizer's future looks a tad murky at this point, and Allergan's stock has already priced in Valeant's offer for the most part. As such, you may want to dig deeper into AbbVie ahead of these pending catalysts, especially now that Shire is seriously considering the latest tender offer.

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