Source: PaxForex Premium Analytics Portal, Fundamental Insight

When major U.S. stock indices plunged into bear territory in 2022, big pharma stocks quickly became an oasis for nervous investors in many cases because of their largely recession-proof business models, solid cash flows, and steady quarterly dividends.

Most pharmaceutical companies outperformed the broader markets last year.

One rare exception to this trend was Pfizer. The stock of this drug maker fell 10.4% last year, despite the company's impressive earnings growth during the year. Unfortunately, Pfizer stock has not been able to shake off this downward trend as the calendar year progresses. In the first four weeks of 2023, pharmaceutical titanium stock is down another 14.5%.

Perhaps it's time to buy the stock while it's trading at a discount. Let's dig deeper to figure it out.

The dizzying drop in Pfizer stock over the past 13 months isn't all bad news, at least not for bargain hunters. From a valuation perspective, the pharmaceutical giant's stock is now trading at a severely compressed price-to-earnings (P/E) ratio of 6.7. By contrast, the industry average for this key valuation metric is currently 24.2. Moreover, Pfizer stock hasn't been this cheap in terms of P/E since 2014.

The decline in the drug maker's stock price has also caused its dividend yield to rise to 3.75% YoY. In the large-scale pharmaceutical industry, the average dividend yield is now 3.27%. Thus, Pfizer stock offers one of the most generous returns in the industry.

With its Comirnaty vaccine and Paxlovid antiviral drug, Pfizer also has ample financial strength to grow its business (BD). Despite recent deals to acquire high-value drugs such as the migraine drug Nurtec, the sickle cell disease drug Oxbryta, and the ulcerative colitis drug etrasimod, Pfizer had about $36 billion remaining in its coffers at the end of Q3 of 2022.

As a result, the drug maker could continue its BD "string of pearls" strategy or possibly make one major acquisition. In short, Pfizer has options on the BD front to create value for shareholders.

However, Pfizer also has fundamental problems. Expected declines in sales of COVID-19 this year, as well as a number of expiring patents on drugs such as Eliquis, Ibrance, and Xeljanz between 2025 and 2030, are expected to have a major impact on earnings in the short term.

Company executives note that Pfizer's diverse portfolio and recent acquisitions should offset most, if not all, of the expected sales declines by 2030. But this argument relies heavily on the clinical success of the assets in hematology and in hard-to-treat indications such as Duchenne muscular dystrophy. Thus, as things stand, Pfizer may find it difficult to meet its long-term revenue projection.

All things considered, Wall Street is probably overreacting in its bearish sentiment toward Pfizer stock. Sure, the drug maker is dealing with some strong headwinds in the form of declining COVID-19 sales and a slew of impending patent expirations.

But Pfizer's internal R&D engine has been running at full throttle lately, and the company has the financial capacity to simply buy its way out of the predicament if one or more key late-stage assets fail to take root in the clinic. Meanwhile, investors can expect an above-average dividend yield on the stock as long as the company slowly overcomes these unfavorable factors.

As long as the price is below 46.50, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 43.99
• Take Profit 1: 42.50
• Take Profit 2: 40.00

Alternative scenario:

If the level of 46.50 is broken-out, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 46.00
• Take Profit 1: 48.00
• Take Profit 2: 50.00