Going to Neutral on Big Pharma

The stocks of large pharmaceutical companies, including Bristol-Myers Squibb (BMY) and Merck & Co. (MRK), which I follow, have outperformed the market significantly so far this year. The pharmaceuticals sector, as measured by the NYSE Arca Pharmaceuticals Index ($DRG) shows a year-to-date gain of 5.2%, as of this post, much better than the S&P 500’s 6.5% decline.

The two pharmaceutical stocks that I follow, BMY and MRK, have outperformed both the $DRG and the S&P 500. Merck’s stock is up 12% year-to-date on price and 13% on a total return basis. Bristol-Meyers is up 23% on price and nearly 25% on a total return basis.

The strong relative performance of the pharmaceutical stocks reflects investors’ perceptions that they are a safe haven in a turbulent market. It is also possible that concerns about their ability to maintain prices have receded with the recent pick-up in inflation. The market may be in the process of revaluing the sector, giving it a higher earnings multiple relative to the broader market averages; but it is also possible that in the short-term at least, the stocks have run a little too far too fast and so may be ripe for a pullback.

As a result of these gains, both of these stocks have exceed my target prices – $85 for Merck and $74 for Bristol-Meyers – much faster than the 6-12 month time frame assumed in my performance outlook. Consequently, I have decided to reduce my performance ratings on both stocks from outperform to neutral for the time being. I will monitor their 22Q1 earnings reports, when they are released later this month and reassess my price targets at that time.

April 12, 2022

Stephen P. Percoco
Lark Research
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Linden, New Jersey 07036
(908) 975-0250

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