Psst... Cheap Drugs Here...

The last time we saw drugs stocks so cheap, investors made nearly 500% gains...

From the bottom in 1994 - to the top in 1999 - the “boring” drug giants like Pfizer and Merck would have made you four times your money. But since that peak, drug stocks have been one of the world’s worst investments.

Fortunately, since the launch of my newsletter True Wealth in 2001, I’ve never bought a drug stock... I’ve never recommended a pharmaceutical company to my readers.

It’s been the right call... as pharmaceutical giants Pfizer and Merck have lost about half their value since 2001, as the chart below shows:

But for the first time ever, I’m getting much closer to buying them...

While drug stocks have lost investors money for the last five years, these companies are still selling more drugs. Sales at Pfizer, for example, have grown by more than 20% a year since 1996. And, unbelievably, Merck’s average annual profit margin in the past ten years has been 20%.

At some point, these stocks are going to look very cheap. I think we’re close...

Pfizer is a good example... the stock is 25 bucks - half of what it was in 1999. Yet analysts expect it will make $2 per share in profit this year... which means the stock is trading at a price-to-earnings ratio of only 12.5 (that’s $25 divided by $2). Pfizer also pays a big 4% dividend.

Why would you own a rental property now, when you can buy a stock like this with those kinds of numbers? If you’re a real estate guy, owning Pfizer shares would be like buying a house with an 8% NET rental yield (after expenses)... and that business will continue to grow.

Pfizer is an empire... Standard & Poor’s states it matter-of-factly in its latest research report: 

“About 15 Pfizer drugs are the leaders in their respective therapeutic markets, five are among the world’s top selling products, and eight generate sales exceeding $1 billion a year. The company’s broad range of drugs reduces its dependence on any single product. Foreign sales accounted for 48% of total revenues in 2005.”

Pfizer’s size and financial strength are advantages, both in terms of making deals with smaller companies with drugs in development, and in dealing with Medicare. According to the S&P report, Pfizer has over 235 products in its pipeline.

I’m no expert in drug stocks... but what I love to buy is:

Assets of extraordinary value... that are cheap... where the uptrend is just beginning.

Major drug stocks are now looking cheap. We ran the numbers in house, and found that, relative to the overall stock market, drug stocks have only been cheaper one time in recorded history (going back to 1973). That time was in 1994.

If you had bought back then, and managed to sell at the top in 1999, you’d have made a profit of 500% in the big-name drug stocks alone. The smaller names were probably up many times that amount.

However...

It’s not time to buy just yet. The uptrend has not yet begun.

The thing about “value” stocks like these is, they can become even more of a “value” after you buy them. You could have said Merck was cheap any time in the last few years. Yet it’s only gotten cheaper...

That’s why I prefer to wait for the uptrend to show itself, and let the market tell me I’m right.

It can take years before an uptrend finally sets in. By waiting for the uptrend, I usually miss the first 20% of a move, of course. But if the move is going to be 500%, I’m all right with missing that.

The idea is, I’m entering the position in a low-risk way, and I’m not sitting on dead money for years, waiting for it to come to life.

I’m no expert in drug stocks. Far from it. But by my math, they’re as cheap as they’ve been relative to the market as any time in recorded history, except 1994.

Once the downtrend is broken - and the uptrend begins - you could make some real money. Chances are good I’ll be buying major drug stocks sometime in the next year or two in True Wealth.

Good investing,

Steve