I find the decline surprising. I don’t have specialist pharmaceutical knowledge – and that brings a degree of risk to an investment in Pfizer stock – but I can’t see that anything has been going significantly wrong with the business.

On the contrary, Pfizer seems to me to be going from strength to strength. Here are three reasons why I think that Pfizer stock might might be a great buy for my portfolio.

Growth

Pfizer has been working hard to grow its drug portfolio lately. Specifically, it’s been using the money it generated from its COVID-19 vaccine to make acquisitions.

The details of Pfizer’s acquisitions might be difficult for non-specialists like me to evaluate. But the important thing, to my mind, is that the company is investing in growth for the future.

Pfizer’s COVID-19 success also seems to be ongoing. Recent approval of its antiviral pill and the use of its vaccines in boosters for under-11s in the US looks set to generate significant cash for the business going forward.

Accordingly, the first reason I think Pfizer looks like a great investment opportunity for me is its ability to generate cash in the future.

Low P/E ratio

Pfizer stock currently trades at a price-to-earnings (P/E) multiple of just over 11. That’s significantly lower than the S&P 500 average, which is around 18.

Normally, I wouldn’t over-emphasise the importance of a low P/E ratio. But I think it might be significant in the current climate.

Rising interest rates have been exerting pressure on share prices this year. As interest rates increase, stocks that trade at higher P/E multiples start to look expensive.

By contrast, stocks with lower P/E ratios are shielded from this effect somewhat. The fact that Pfizer’s shares trade at a low P/E ratio is therefore my second reason for thinking that the stock could be a great investment for me.

Investment returns

In my view, Pfizer has a good record both as a company and as a stock. Over the last five years, Pfizer stock has been a solid investment.

The share price has increased by 65.8% since June 2017 and Pfizer has paid out $9.64 per share in dividends to shareholders. In addition, Pfizer shareholders received stock in Viatris, worth around $1 per share as a result of Pfizer disposing of its generic drug unit.

Past performance are not always indicative of future returns and there’s a risk that Pfizer might struggle to maintain its momentum. But I think that Pfizer’s historic success is indicative of a strong business and a competent management team that will set the company in good stead for the future.

Conclusion: a stock to buy?

I’d be happy buying shares in Pfizer at today’s prices for my portfolio. While pharmaceutical companies are complicated, I think there are reasons to think that the stock could perform well over time.

Pfizer is making investments in its drug portfolio, trading at a reasonable price, and looks like a strong operation with a capable management team. That’s enough for me.

As such, here are three US stocks I would buy for my portfolio in 2022. 

US stocks to buy for growth 

Google’s parent company, Alphabet (NASDAQ: GOOG), is one of the world’s largest technology corporations. It has built its brand over the past two decades through the Google search engine, but today, the establishment is far more than a web portal. 

Alphabet owns cloud computing assets, a hardware and software business, and has a portfolio of startup bets. Together, these assets suggest that the business is built for whatever the world throws at it.

They also indicate to me that this company is one of the best ways to invest in the growth of the global internet infrastructure. As the technology sector continues to boom, the business should reap the benefits. 

These are the main reasons I would buy the shares for my portfolio for 2022 and beyond.

Some challenges it could face include regulatory headwinds, which could force the breakup of the business. This is the worst-case scenario. 

DIY giant

Home Depot (NYSE: HD) has been one of the big winners of the pandemic. Stuck-at-home consumers have flocked to the firm’s stores to purchase tools and equipment for DIY projects. And even though the world has opened up over the past few months, the US retailer’s sales have continued to grow. 

The retailer reported $36.8bn in sales during the fiscal quarter to the end of October, representing a 9.8% increase compared to the year-ago period. Moreover, big-ticket transactions of more than $1,000 were up 18% year-on-year, giving the company’s net profit margin a big leg up to 11.2%, from 10.2%. 

Considering these figures, I think the company is one of the best US stocks to buy in 2022 as it builds on the growth of the past few years. As we advance, challenges it could face include higher wage costs and other inflationary pressures, which could hurt revenue growth and increase costs. 

Global pharma champion 

Pfizer (NYSE: PFE) is one of the largest pharmaceutical companies in the world. Today, it is best known for its Covid-19 vaccine, which is generating billions in sales for the group. 

But there is far more to this business than its vaccine division. It has a vast portfolio of treatments both on sale and under development, which will add support to the company’s growth in the future.

What’s more, the company should be able to use the profits from its Covid vaccine sales to invest in additional research and development projects. 

Pfizer has plenty of other attractive qualities as well. The group has a robust balance sheet and a dividend yield of 2.6%, at the time of writing. Management has also distributed large amounts of capital to investors in the past with share repurchase. 

Unfortunately, despite these qualities, the company’s success is not guaranteed. It will face challenges, including regulatory headwinds and competition in its drug markets. These could increase costs for the group, reducing profit margins. 

Over the past year, Pfizer shares have produced a total return of 41%, outpacing the S&P 500’s total return of around 26%. 

Pfizer shares surge

Investor sentiment towards the pharmaceuticals group has been buoyed by its coronavirus treatments. Not only does the company jointly produce one of the world’s leading vaccinations for the virus, but it also recently published strong clinical data for its coronavirus antiviral treatment, Paxlovid. 

In non-hospitalised coronavirus patients, this treatment substantially reduces the risk of hospitalisation by 89%. Some doctors and analysts have described it as a game-changing development in the world’s battle against this disease. 

That is why shares in the company have performed so well recently. However, this is unlikely to be a substantial long-term revenue generator for the group.

Almost every single large pharmaceutical company in the world is working on different coronavirus treatments, so the competition is fierce. Pfizer’s offer may be one of the first out of the gate, but it certainly will not be the last. 

But there is far more to the company than just its coronavirus drugs. 

Sector giant

Pfizer is one of the world’s largest pharmaceutical corporations with a broad portfolio of products and treatments. The company recently said it is projecting total revenues of $81bn for the current financial year. Of this, $36bn will account for sales of its coronavirus vaccine. 

Aside from this blockbuster treatment, the company has seven other flagship treatments in development and on the market. These include the blood thinner Eliquis and cardiovascular drugs Vyndaqel/Vyndamax. Sales for both of these drugs jumped by a double-digit percentage in the third quarter. 

On top of these, the group has a further 94 drugs under development. Of these, 29 are in stage-three testing (the final step before submitting them to regulators for approval).

Of course, there is no guarantee these products will ever make it to market. If they do not, the company could struggle to replace revenues from its coronavirus vaccine over the next few years. This is probably the biggest challenge the group faces right now.

As I noted above, competition in the coronavirus treatment space is fierce, and while Pfizer may be benefitting from a revenue boost today, it is not clear how much longer that will last. Management is already projecting vaccine revenue will fall to $29bn in 2022. 

Still, despite this risk, I think Pfizer shares look attractive considering the company’s valuation, treatment pipeline, and dividend potential. The stock is selling at a forward price-to-earnings (P/E) multiple of 11.6 and offers a 3.2% dividend yield. 

As the firm continues to build on its successes over the past year, I would buy the stock for my portfolio today. 

Recent trading update

In the first-quarter trading update, the positive impact of the vaccine could be seen. In fact, Q1 revenues were $14.6bn, 45% higher than the previous year. Profits were 48% higher at over $5bn.

These are clearly very strong results and demonstrate why Pfizer shares have managed to rise recently. The company also announced a quarterly dividend of 39 cents per share. This equates to an annual yield of roughly 4%. In comparison to the majority of pharma companies, this is high and I feel it offers a compelling reason for me to invest.

The recently strong financial results have equally demonstrated the positive impact of the coronavirus vaccine on the company. Indeed, Pfizer expects to generate $26bn in revenues from the vaccine alone. These revenues seem fairly safe. This is because it has signed a number of long-term contracts with governments around the world, many of which extend until 2024. The problem here is whether Pfizer can maintain its revenue growth after the need for coronavirus vaccinations has diminished.

What does the future hold?

Fortunately, Pfizer is not entirely reliant on the vaccine, and its core business has continued to perform strongly. Indeed, excluding the effect of the vaccine sales, revenue growth was still 8%.

Furthermore, the company has invested large amounts of cash into research and development, which will hopefully come to fruition in the future. In fact, as of March, Pfizer’s pipeline included 99 potential new therapies. Although not all of these will work out, it is still very promising. A new, successful drug would likely have a positive effect on the Pfizer share price.

Even so, there are risks that need to be pointed out. For example, many of Pfizer’s most successful drugs are coming up to patent expiration. These include the immunology drug Xeljanz in 2025 and Prevnar 13 in 2026. This means that generic competition will be able to enter the market. As such, it is vital that the company can continue to expand its pipeline in case sales of these drugs are negatively affected.

Is the Pfizer share price a bargain not to be missed?

This year the firm expects earnings per share of around $3.60. This gives Pfizer shares a price-to-earnings ratio of around 11, which does indicate a cheap valuation. After the success of the vaccine, it is also hoped that the company can build on this and remain a leader in innovation. Hopefully, this would be met with even larger profits in the future. So, I do believe the Pfizer share price is too cheap and has some upside potential. As such, I’m very tempted to add Pfizer shares to my portfolio. 

No points for guessing the reason for the stock market rally though. The US’s election polls had global stock markets on tenterhooks for much of last week and the rally was initially driven by Biden’s win. Pfizer’s successful coronavirus vaccine has also added to huge investor relief.

What the ‘Biden bounce’ means for the FTSE 100

Both imply that the worst is over for stock markets. Uncertainty around the US’s political future was moving them sideways and Covid-19, of course, had sent businesses across the world in the doldrums. The US economy was expected to show healthy growth in 2021, but forecasters like Goldman Sachs said that a Biden win would improve growth prospects even more.

I think companies with a strong US market stand to gain. Recently, I wrote about how the Irish construction firm CRH could be a big gainer in time. There are at least two more stocks in this category. One is Ashtead, the FTSE 100 industrial equipment rental company. More than half its revenues come from the US.

Another is the FTSE 100 luxury brand, Burberry. It will get a double boost in demand from a Chinese bounceback and now the US. The US accounts for a smaller, but still substantial 23%, share in its revenues.

FTSE 250 stocks to consider

In a similar vein, I’d now consider buying the beleaguered fashion brand and retailer Ted Baker. After a reset following last year’s fiasco, the company has been struggling like many others in 2020. However, with 30% of its sales generated in North America, the tide may be about to turn for it.

I’m also hopeful about Cineworld, which has a strong US presence too. Its share price has already bounced back, with a very likely shot in the arm from the Pfizer news.  

FTSE 100 stocks I’d avoid now

FTSE 100 precious metals giant Polymetal International, on the other hand, has weaker prospects in my view than earlier. The reasoning is straightforward. Precious metal stocks have rallied this year on macro-economic and financial markets uncertainty. With some stability back, I reckon the gold price’s rise will slow down. This, in turn, will impact gold stocks. 

It doesn’t mean that all will be lost for them. POLY, for instance, showed strong revenue growth even before the gold price rally. But if the price of gold is the sole reason for buying the stock, I’d think it through first.

I’d think similarly about Fresnillo, another FTSE 100 precious metals miner. It may not have lost its lustre, but it is probably dimmed for now. If Pfizer’s vaccine news turns out less positive than is now suggested, there could be a bounce-back in gold stocks. Over time though, I reckon their growth will temper.

Some of the biggest dividend stocks offer even larger yields than that, which can really turbocharge your income. Here are two 5% yielders that caught my eye. I thought they might fit nicely in your Stocks and Shares ISA but on closer inspection, I’d approach with caution.

GlaxoSmithKline

Pharmaceuticals giant GlaxoSmithKline (LSE: GSK) is one of the most renowned FTSE 100 income stocks and that remains the case today. Its current forecast yield is 5.1%, with cover of 1.4. However, the Glaxo share price has underperformed horribly, and trades 3% lower than five years ago, whereas the index as a whole is up 12% over the same period.

Worse, the dividend has been frozen at 80p since 2015, and is expected to stay there for at least the next couple of years. Free cash flow fell by 50% to £165m in the three months to 31 March. Net debt of £22bn is another worry, although plans to spin off its consumer healthcare business in a £10bn joint venture with US rival Pfizer should reduce that.  

Glaxo has been hit by some blockbuster drugs going off patent, notably Advair, which has made up almost a quarter of revenues. Investing in R&D to strengthen its drugs pipeline has taken priority over rewarding shareholders, as management looks to get those revenues flowing again.

Pipeline panic

Glaxo has had some success on that front, recently reporting positive data for several potential new medicines in HIV and oncology, but it needs a lot more of this to fully convince.

CEO Emma Walmsley is pushing on with her turnaround plans and the company’s stock is yours for a relatively bargain price of just 14.3 times forecast earnings. This is low for Glaxo and Roland Head recently suggested that this might make a good entry point.

However, you are relying on Glaxo replenishing its pipelines and there are no guarantees on that score. The stock is riskier than I feel it should be.

Sainsbury’s

Investors in supermarket giant J Sainsbury (LSE: SBRY) have endured a dismal 12 months, its stock crashing 40% in that time. The grocery sector as a whole has struggled due to Brexit, squeezed incomes, Aldi and Lidl, but the Sainsbury’s share price has had by far the worst of it. Morrisons has fallen ‘only’ 18%, and Tesco just 5%.

Sainsbury’s was hit hard by the collapse of the Asda merger, which has offset the good news from its apparently successful takeover of Argos. This is forcing the group to focus on its core retail offering, and management is now looking to cut labour costs, boost buying terms and revamp its own label range to revive profits. 

Taking stock

I reckon Sainsbury’s has its work cut out as Brexit squeezes incomes and the German discounters continue to make strides. Debt is another concern. On the plus side, the 5.5% yield is tempting and looks solid with cover of 2.0.

Sainsbury’s stock also looks cheap trading at 11.2 times earnings. Earnings may pick up slightly going forward, and the share price might spike as investors finally decide it has been oversold. I can’t work up much enthusiasm for it though.

The previously proposed tie up between Pfizer Inc (NYSE: PFE) and Allergan Inc (NYSE:AGN) was the largest such deal ever to have been attempted, with the price tag that Pfizer was prepared to pay being in excess of £100bn. Ever since rumours of the purchase first began to circulate, legislating to prevent such corporate manoeuvres has been a top priority in Washington.

The last laugh

Last week, in the absence of action from Congress, the US Treasury Department had what appears to be the last laugh on the inversion issue, at least as far as the Pfizer-Allergan deal is concerned. While acknowledging that inversions cannot be stopped without legislation from Congress, the US Treasury announced a wave of new measures that will make it more difficult for some US companies to invert.

The new rules have already had an effect as, on Wednesday afternoon, both Pfizer and Allergan announced that they will no longer be going ahead with the merger and will instead, go their own separate ways. The news prompted strong gains across the London pharma sector, with shares in Astrazeneca (LSE: AZN) and Shire (LSE:SHP) each rising by almost 5% as traders speculated that Pfizer could soon be back on the acquisition trail in London.

The rub

Whether or not the US Treasury’s new rules will eliminate the practice of inversions, or even just reduce the prevalence of them, still remains to be seen. However, one thing that is for sure is that, in an election year, corporate taxes and tax inversions will make for a brilliant political football. It seems possible, maybe even likely, that Congress comes under increasing public pressure to get its act together on the subject of inversions and to legislate in order to prevent them.

Regardless of whether they do or don’t, the US Treasury department seems determined enough to make life difficult for corporate tax avoiders and this alone should probably provide cause for concern among speculators hoping to see Pfizer back in London. It seems clear from the announcement that it does not take issue with genuine mergers and acquisitions, which take place for non tax purposes, but that when companies use M&A to avoid taxes they will act where possible.

Strategic sense

If Pfizer or any other company seeking to invert could demonstrate that an acquisition in London would make strategic sense for the business, for growth or efficiency’s sake, then it seems possible that they would have a ‘get out of jail free card’ on the subject and they may then be able to carry out an inversion in disguise.

However, with two empty pipelines between them, as well as two sets of revenues exposed to patent expiration induced decline, it is less clear as to whether a merger with either Astra or Shire would make any kind of strategic sense for Pfizer once the obvious tax benefits are set aside.

Downside

Almost everybody in town knew it could end badly for Astra shareholders, but I reckon the full extent of the damage has yet to become apparent. The downside for Astra shareholders is 20% or more from this current level (4,456p), in my view.

Now that Pfizer is officially out of the game — although it may target smaller deals in the region of $70bn — the drop in Astra’s share price could be even more painful because investors may feel entitled to abandon Astra, betting on Shire and GlaxoSmithKline instead. Both Shire and Glaxo boast more promising prospects, and are relatively cheaper than Astra, based on a series of factors, including fundamentals.

On 28 October 2014, soon after Pfizer decided to allocate billions of capital to buy back its own stock, I warned our readers. Ever since, Astra stock has risen 3.2%, which compares with a +6.2% performance for the FTSE 100. During the period Shire has risen 21%, and even Glaxo has done much better, recording a +8.2% performance.

Who should take the blame? Of course, Astra’s chief executive officer, Pascal Soriot, is under pressure to show investors he was right to reject Pfizer’s proposal, which was 25% higher than Astra’s current equity value, and included a large Pfizer stock component.

A mighty task…

October 2014

“I’d also suggest that looming US and Irish rules on tax inversions are playing their part,” a senior analyst told me back in October, when I flagged the risk of holding Astra shares. 

“They (regulators) already scuppered the Abbvie/Shire takeover, and since Pfizer/AstraZeneca was a similar tax-driven move there’s no reason to expect Pfizer to re-enter the bidding, at least not at anywhere near the previous price, since a combination won’t have the same tax breaks that it might have had earlier,” he added then. 

So, big funds have been left holding an overvalued stock that pays a decent dividend. What’s next, then?

Of course, Mr Soriot has the opportunity to turn things around. Don’t ask me how – I have no clue, really. What I know is that Astra has a medium-term plan according to which earnings will grow at an astonishing rate over the next few years. What I also know, however, is that Mr Soriot had better be quick, because deals such as the acquisition of the branded respiratory drug business of Actives in the US and Canada — which was announced on Thursday in the wake of disappointed Q4 results — won’t move the needle and won’t keep investors happy for long, either.

The answer is no, in my view. A more relevant question is: how long will it take for their shares — which trade at £44 — to drop to £31?

Get Ready For The Drop

Between 2011 and 2013, the revenue and profits of Astra plummeted as many of its popular drugs went off-patent, but Astra continued to pay a healthy dividend. During that period, the shares of Astra traded in the £30-£36 range, and rose by 19.5%.

Astra stock has struggled to trade higher than £36 for about a decade until the end of 2013. That price is not only my best-case scenario right now, but is also the level where the shares changed hands before takeover rumours emerged in January.

Analysts 

For the record, in November and December 2013, only a few weeks before takeover rumours emerged, analysts’ estimates were split as follows: a) a bull-case scenario, with a price target of £37; b) a base-case scenario, with an average price target of £32; c) and a bear-case scenario, with a price target of £25.

(Those price targets were maintained for most of 2013. There is no evidence, in my view, that Astra’s pipeline of drugs will deliver the growth rate that is necessary to justify a valuation above £36 a share.)

Earnings Per Share, Operating And Net Income Margins

In 2011 and 2012, Astra’s earnings per share (EPS) were much higher than the EPS that Astra is expected to report this year, in 2015 and in 2016. The dividend is still appealing, you may argue, but is not expected to skyrocket anytime soon.

Astra stock is pricey based on several trading metrics, but there’s more you should know before assessing its fair value. Even if Astra grows according to bullish market estimates until the end of 2017, it won’t be able to match the operating and net income margins that it reported in 2012, when its stock traded in the £25-£31 range.

If analysts are right, the net income margin of Astra in 2017 will be 13 percentage points below its net profitability in 2012. That means that cash flows will be less supportive of dividend payments. In fact, I believe Astra will be forced to cut its payout next year or earlier. Then, a 2015 price target of £31 makes a lot of sense.

This Isn’t Enough?

What Astra’s stock price tells us is that investors are aware of the possibility that Pfizer — whose quarterly results beat expectations on Tuesday — will not show up with a blown-out offer. 

And even if Pfizer makes a comeback, how many investors will agree to receive 50% or more of the offer price in Pfizer stock? Surely, the cash portion of any potential offer will be lower than 50%. Then why would anybody want to hold stock in a slow-growth conglomerate whose management, rather than bidding up for a key target, decide to splash out $11 billion on a stock buyback?

Is that you? That’s certainly not me! 

With this being the case, it’s entirely possible that Pfizer could come back and make a bid for Glaxo, as the U.S. behemoth searches for bolt-on acquisitions to boost growth. 

A great fit

Glaxo and Pfizer would fit together well. The two companies are already cooperating together on some projects, including an HIV joint venture and Glaxo has a strong presence within the vaccines market — something Pfizer is likely to find attractive.

What’s more, Pfizer is bound to be attracted by Glaxo’s low corporate tax rate of only 20%.

However, if Pfizer did to go ahead and launch a bid, Glaxo’s deal with Novartis would fall apart. Indeed, it is unlikely that Pfizer would be attracted to Glaxo’s world-leading consumer healthcare business.

Further, Pfizer would want to gain access to Glaxo’s oncology portfolio, which is being sold to Novartis as part of the deal. 

Then there is the price to consider. It’s likely that Pfizer will have to offer a significant premium to Glaxo’s current share price, in order for the offer to be accepted by investors.

Specifically, City analysts believe that Pfizer would have to offer a premium of 40%, or just under 2,000p per share. A cost to Pfizer of around $170bn, some analysts believe that this figure is too large even for the world’s largest pharmaceutical company.  

Second attempt 

Meanwhile, it has also been rumoured that Pfizer will make another attempt to buy Astra during the next few months. 

These rumours stem from the fact that Pfizer has recently been facing significant pressure from investors, after unveiling a poor set of half-year results. The company is now under pressure to re-enter negotiations in order to boost its treatment pipeline and flagging profits. 

Pfizer has to wait until November before it can make another unsolicited approach for Astra, although if Astra’s shareholders for the company back to the table, an offer could be made sooner.

And it appears as if Pfizer is running out of time to cut a deal with a UK based company. According to people with knowledge of the matter, the process of tax inversion, where a company shifts its global tax base by buying a smaller rival, may be outlawed within the next 18 months, which would make any deal between Pfizer, Astra or Glaxo less attractive.