Motley Fool: A Pfine Idea

The world’s leader in prescription drug sales, Pfizer (NYSE: PFE) covers a lot of ground with its product lineup, from top-selling pneumococcal vaccine Prevnar 13 and epilepsy fighter Lyrica to treatments such as cholesterol lowerer Lipitor and erectile dysfunction drug Viagra.

Pfizer has been the poster child for the patent cliff, that period of time immediately following the loss of patent protection on a lucrative drug. Lipitor had once generated as much as $13 billion annually, but it has since seen 85 percent of the drug’s revenue wiped out as generics hit the market.

Still, Pfizer has a deep portfolio of drug candidates in its pipeline that should usher in a new period of prosperity. As of Aug. 1, it had 99 ongoing clinical-stage trials and registration reviews, including 32 late-stage studies. Its advanced breast cancer drug Ibrance has already posted more than $1.5 billion in worldwide sales in the first six months of 2017, while sales of anti-inflammatory Xeljanz are growing briskly, too.

The stock offers patient investors a dividend that recently yielded 3.6 percent and that has been increased by 45 percent over the past five years. Loss of exclusivity for legacy drugs remains the most significant challenge for Pfizer, and declining sales from these drugs will continue to weigh down its growth. Still, though, Wall Street expects Pfizer to grow earnings by close to 6 percent annually over the next few years.

Ask the Fool

Q: What could be going on with a company I’m considering investing in? It seems to be doing everything right, as its sales and earnings have been growing at double-digit rates, and it’s carrying no debt. Yet the stock keeps falling. – H.P., Norwalk, Connecticut

A: Study it more closely. Even steep growth rates may be lower than previous levels. Check out expectations, too. If the company and/or Wall Street analysts expect slower growth in the future, that can dampen enthusiasm for the stock, with many people selling shares and thereby depressing its price. Perhaps competitors are fast advancing on the company or questions have been raised about its management or offerings. Remember that investors need to focus on any company’s future more than its past.

Then there’s the stock price itself. Since the company has been growing briskly, investors may have bid up the stock to lofty heights, well above its intrinsic value, and the price may now be settling back to more reasonable levels. Always look at a company’s big picture.

Q: Can you explain what Warren Buffett’s mentor, Benjamin Graham, meant when he said, “In the short run, the market is a voting machine. In the long run, it’s a weighing machine”? – K.T., Carson City, Nevada

A: Graham was pointing out how from day to day, the stock market reflects the popularity of various stocks and the psychology of investors. Investors “vote” by buying and selling, sending prices up and down. Over the long run, though, the popularity contest fades away and value is what matters. Stock prices ultimately reflect or approach the value of the underlying companies, based on their sales and earnings and their potential growth. Invest for the long term.

My dumbest investment

I bought shares of Sirius XM Holdings and Taser International at their highs. I don’t think they will ever get where they need to get so I can get rid of them. I paid too much for both, and I just keep holding. Oh well, I’m learning. – D., online

The Fool responds: Your story offers several lessons. First off is the importance of patience. Taser, which has been redubbed Axon Enterprise, is still underwater for you, but Sirius is up about 23 percent as of this writing, since you wrote to us. Stocks rarely behave exactly as they’re expected to.

Next, don’t think so much about a stock’s highs or lows. A stock that has fallen to a 52-week low can still fall further, while a stock that has doubled or tripled can still keep rising – over the short or long term. It’s more helpful to try to figure out what a given stock (one tied to a healthy and growing company) is really worth and then aim to buy when it’s undervalued. That way it will be more likely to rise in value than to fall.

Finally, if you have little faith in any holding, unload it – no matter whether that will deliver a gain or loss. Whatever money is left in it can be redeployed into a stock in which you do have a lot of confidence.