Never in my time writing for Motley Fool have I received so much negative email as when I wrote a negative article about Pfizer (NYSE:PFE) last May. It seemed to be hard to see future top-line growth. I thought the stock would lag the Standard & Poor's 500 and, more importantly, the health-care sector. Pfizer is expected to have revenue of $52 billion in 2004. Revenue growth for 2005 is projected to be only 6%. That is wildly mediocre. I opined in May that one way to think of Pfizer's dilemma is that it would need five new blockbuster drugs -- blockbuster defined as anything more than $1 billion in revenue per year. I don't see it.
Since that article, Pfizer is down 12%; the health-care sector, as represented by the iSharesDow Jones U.S. Healthcare Sector Index Fund, is down close to 5%; and the S&P 500 is up about 4%.
On Thursday, the stock took a hit because some folks want Celebrex, Pfizer's COX-2 inhibitor that stands to benefit from the woes of Merck's (NYSE:MRK) Vioxx, to go through testing to make sure it is safe.
After that, I was talking to my good friend John, who manages money in San Diego. I mentioned that I have been bearish on the stock for months. Naturally, John owns it for his clients. As he began to lay out the bullish case for it -- "... 14 out of the 25 world's top-selling drugs, great pipeline and only two drugs coming off patent..." -- he took on an almost religious tone.
Although many investors don't believe this, the law of large numbers caught up to Pfizer several years ago. This has been going on with megacaps from all sectors. There are 17 American companies with market caps above $100 billion. Eleven of the 17 have lagged their sectors for the last three years. The list of laggards includes Pfizer, AIG, Microsoft (NASDAQ:MSFT), ExxonMobil (NYSE:XOM), Altria (NYSE:MO), Coca-Cola (NYSE:KO), and General Electric (NYSE:GE).
Typically, megacap stocks outperform the market toward the end of the stock market cycle. This means that in addition to growth being very difficult to achieve, there may be a lack of investor demand for these companies. Those are two mighty tough headwinds to overcome.
My opinion has not changed much since the first article. Pfizer is still the wrong stock in the wrong group. Proper diversification means you need exposure to health care, but it may be a while before domestic big pharma can provide leadership.
Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time, neither he nor his clients owned any of the stocks mentioned.
