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Would You Buy These Cheap Stocks?

By Dan Dzombak - Updated Apr 6, 2017 at 12:36PM

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Compare how Main Street's stock ratings differ from Wall Street's.

To whom should you listen when researching a stock, Wall Street or Main Street? Wall Street has its analysts and they don't have a good track record. They are known to be short-sighted, overoptimistic, and never negative. Savvy investors read their research but ignore their buy and sell ratings. So whom can you trust?

At Motley Fool CAPS we use the collective opinion of 165,000 investors to inform our stock ratings. Members are scored on their accuracy and overall outperformance of the S&P 500. We then aggregate all the ratings so that members with higher scores have more influence on a stock's CAPS rating. This gives us some of the best ratings around.

Let's look at a few pharmaceutical stocks CAPS investors think are cheap:

Stock

Analysts Buy Rating
(out of 5)^

CAPS Rating
(out of 5)

2010 Expected P/E

P/B

Pfizer (NYSE: PFE)

4.0

****

6.7

1.3

Merck (NYSE: MRK)

4.1

****

10.4

1.9

Somaxon (Nasdaq: SOMX)

5.0

**

N/A

2.0

Source: Yahoo! Finance.
^The Yahoo! analyst rating numbers have been converted to align them with CAPS ratings, so that both run from 1 (worst) to 5 (best).
P/E = price to earnings. P/B = price to book value.


Pfizer has been beaten down by worries about its acquisition of Wyeth going poorly and the unknown effects of health-care reform. As long as its acquisition goes well, and large acquisitions have a history of not going well, this will be a long-term winner. With a 2010 price-to-earnings ratio of just 6.7, the downside is more than factored into the stock's price. It may increase its dividend, which currently sits at $0.72, as it pays down the debt it took on for the acquisition.


Like Pfizer, Merck made a large acquisition (Schering-Plough) to strengthen its pipeline last year. This helped the company mitigate patent expiration fears plaguing companies such as Eli Lilly (NYSE: LLY), which has almost 50% of its current revenue coming from drugs set to lose patent protection between now and 2013. Merck is also working to bring down its cost structure in the face of patent expirations. Just last week the company announced it is closing 16 facilities, half research facilities, half manufacturing plants, as part of its goal to achieve cost savings of $3.5 billion by 2012. With a P/E of 10.4, a dividend yield of 4.3%, and a firm pipeline in place, this is one to bet on for the long run.


Somaxon sleep aid Silenor was approved this past March, which explains that huge jump in the above chart. It has tough competition, however, in the $2 billion insomnia market dominated by sanofi-aventis' (NYSE: SNY) Ambien and Seprecor's Lunesta. Somaxon is beginning the process of bringing Silenor to market, but with some drug manufacturers sitting on hoards of cash, most notably Bristol-Myers Squibb (NYSE: BMY) with $6.8 billion in cash and short-term investments, many investors believe the best opportunity for the company is to be bought out. For a deep dive on the stock that values the company between $5.75 and $7.25 a share, take a look at CAPS Top 10 All-Star UltraLong's blog post on Somaxon.

Is this a good time to hop on the Big Pharma bandwagon, or do other companies such as Somaxon catch your eye? Let us know in the comments box below!

Dan Dzombak does not have a position in any of the stocks mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Eli Lilly and Company Stock Quote
Eli Lilly and Company
LLY
$308.08 (2.63%) $7.89
Sanofi Stock Quote
Sanofi
SNY
$44.37 (2.19%) $0.95
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$50.11 (3.77%) $1.82
Bristol Myers Squibb Company Stock Quote
Bristol Myers Squibb Company
BMY
$75.57 (1.49%) $1.11
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$91.02 (2.35%) $2.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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