When it comes to investing in the stock market, there are very few certainties. However, one so-called trick of the trade that has proved worthy time and again is that holding high-quality stocks over the long term usually delivers consistent gains and real wealth creation over the long-term. Trying to time your buying and selling activity based on the short-term vacillations in the stock market simply isn't a practice shown to create consistent gains over long periods of time.
J.P. Morgan Asset Management put this to the test by running various models of investor returns based on movements in the S&P 500 over a 20-year period (Dec. 31, 1993-Dec. 31, 2013). The findings showed that investors who held for all 20 years without selling -- and yes, this includes holding through the dot-com crash and housing bubble -- saw their investments increase by 483%. Those who tried to time the ups and down and missed just the 10 best trading days saw their 20-year gains chopped to 191%. If you missed more than about a month of the best gains, your return was nearly flat.
The big issue, of course, is finding these so-called "high-quality stocks." We want companies that are game-changers, industry leaders, income producers, and highly profitable, if at all possible. One company that just might fit that bill and be a great long-term addition to your portfolio is drugmaker Pfizer (NYSE:PFE).
15 reasons to buy and never sell Pfizer
Why Pfizer? Here are 15 reasons you might want to consider this drug giant an asset you'll want to buy and hold forever.
1. History: Pfizer's storied history began all the way back in 1849, when German entrepreneur's Charles Pfizer and Charles Erhart developed an oral formulation of santonin, an antiparasitic drug used to treat intestinal worms. The rest, you could say, is history, with Pfizer expanding its product portfolio to dozens of drugs today. Put another way, Pfizer's 167-year history implies it's going to be there for investors through thick and thin.
2. Huge pipeline: Drugmakers are typically valued equally for their pipeline as they are for their developed products. Pfizer has one of the largest pipelines in the world, with an update in early February showing 90 combined clinical and registration trials. Of those 90 studies, which are across six therapeutic focus areas, 13 trials advanced since its last update, and only three were discontinued. Furthermore, 59 of these studies involve new molecular entities, and not just label expansion opportunities for existing drugs.
3. Cash flow: Strong cash flow is often the sign of a solid long-term business model. Over the last decade, Pfizer's worst year involved it generating just shy of $10 billion in free cash flow (2010). Comparatively, it's netted in excess of $15 billion in FCF in seven out of those 10 years. Generating such massive cash flows gives Pfizer liberties when it comes to growing its pipeline organically, inorganically, or rewarding its investors.
4. Product demand inelasticity: It also doesn't hurt that the products Pfizer sells are inelastic. In other words, people can't choose when they're going to get sick, or what illness they're going to contract. This means that Pfizer's products are generally recession-proof.
5. Operating margin: Having products that are in demand year-round also means that Pfizer tends to command strong pricing power. This, in turn, generates impressive operating margins. In each of the past five years Pfizer's operating margin has hit or surpassed a juicy 22%.
6. Cost-cutting prowess: Operating margins are also aided by company tactics to control expenses. Pfizer has demonstrated that it's particularly adept at improving efficiency through its manufacturing processes. Having levers it can pull to reduce its costs can help abate worries over generic competition eating into sales of its mature drugs.
7. Inorganic growth: Having solid FCF and operating margins affords Pfizer the ability to supplement its internal growth with mergers and acquisitions to grow its product portfolio pipeline. For instance, its $17 billion acquisition of Hospira in 2015 added a new line of injectable drugs to its established drug portfolio as well as biosimilars, a new class of biologic drugs that act as copycats to brand-name therapies.
8. Dividend yield: Dividend reinvestment can provide the foundation for real wealth creation, and Pfizer's current yield of 3.7% can go a long way toward making that happen. Based on its current yield, investors would get a full return on their investment solely because of Pfizer's S&P 500-topping dividend in 19 years with reinvestment. If Pfizer's dividend grows, or its share price appreciates, that's just gravy for investors.
9. Share buybacks: In addition to sharing a percentage of its profits with shareholders, Pfizer is also an active buyer of its own common stock. Using cash on hand to buy back stock lowers the number of shares outstanding and can make its valuation relative to EPS appear more attractive. Inclusive of stock buybacks and dividends paid, Pfizer has returned nearly $78 billion to its shareholders since the beginning of 2011.
10. Oncology: In terms of specific therapeutic focuses, oncology is a big reason to own Pfizer. From its advanced breast cancer drug Ibrance, which is set up for label expansion that could translate into multi-billions of dollars in annual sales, to its partnerships with Merck KGaA to develop cancer immunotherapy avelumab to give cancer patients' immune systems a boost, Pfizer's oncology portfolio and pipeline is filled with blockbuster potential.
11. Rare-disease research: It may be entirely clinical for the time being, but Pfizer's rare disease research is exciting. We're looking at the potential for orphan-disease patients to have new therapies hit pharmacy shelves, and we should be expecting Pfizer to benefit from the lack of competition for rare-disease indications.
12. Biosimilars: These new biologic drugs that Pfizer has in its arsenal are poised to price at a 10% to perhaps 50% discount to brand-name therapies, and they're expected to take market share from some of the biggest blockbusters. We're talking about cancer drugs Herceptin, Avastin, Rituxan and Neulasta, as well as the best-selling drug in the world, Humira. Biosimilars could be a major growth driver for Pfizer over the next decade and beyond.
13. Prevnar family of vaccines: Another reason to consider Pfizer is its stellar vaccine portfolio, led by its Prevnar family of vaccines. Prevnar 13 is Pfizer's pneumococcal vaccine that the Centers for Disease Control and Prevention suggested all adults aged 65 and up get every year along with the Pneumovax23 vaccine. Pfizer's management estimates it's captured about 30% of that market in the U.S. -- and that alone has made Prevnar the top-selling global vaccine. Pfizer is next looking at a long-tail growth opportunity in Europe.
14. Unlocked value: Aside from acquiring other companies, Pfizer may be able to unlock shareholder value by splitting up into smaller, easier-to-understand entities. Specifically, Pfizer may be able to spin off its global established products, or GEP, unit if it can demonstrate that it can grow independently of the other core business segments (i.e., innovative products, oncology, and vaccines). A spinoff may very well unlock value for shareholders.
15. Institutional ownership: Wall Street likes Pfizer as well, with 72% of its shares held by institutions, according to the most recent data. This doesn't mean Pfizer shares will necessarily move higher, but it implies that a lot of big money believes Pfizer's stock will be worth more in the future than what it is now.
What key point would make you buy and hold Pfizer forever? Share it in the comments below.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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