In an article this week, Barrons notes that the big drug stocks trade today for just 12 to 14 times projected 2004 profits. The last time the drug stocks saw valuations like these was in 1993-94 when Wall Street feared President Clinton’s health-care proposals would lead to industry price controls.
Pfizer and Merck are two of the stocks mentioned in the article. The consensus earnings projection for PFE over the next 12 months is $2.33. Using Friday’s closing price of $28.50, the forward PE is (28.50/2.33) or 12.2. PFE’s historical 10-year average PE is 32.6.
The consensus earnings projection for MRK over the next 12 months is $2.77. Using Friday’s closing price of $30.50, the forward PE is (30.50/2.77) or 11.0. MRK’s historical 10-year average PE is 22.6.
There seems to be a correlation between stocks that have a good return on equity (ROE) year after year and quality growth stocks.
Here is a screen using AAII SI Pro with the following parameters:
– ROE for each of the last seven years > 15%
– Current PE < 5-year average PE
- (PE / EPS growth) < 1.5
- 5-year (diluted) EPS growth > 10%
– Projected long term EPS growth > 10%
– positive EPS growth for each of last 4 quarters
Using data from October 8, the screen yielded 22 stocks.
17 of the 22 stocks have an U/D ratio > 3.0, total return > 15%, and a relative value < 110. In an equally weighted portfolio, all of these stocks together would have a total return of 20.1%, a PAR of 15.1%, an U/D ratio of 4.7, and a relative value of 89.1. The attached PDF file contains a PERT chart (sorted by total return) and a trend report (sorted by PAR) with the stocks passing the screen. The PERT chart uses First Call data for projected EPS and 5-year growth.