Merck Guides Higher

I don’t consider myself to be a value investor. I like growth stocks, and I’m willing to pay for them. I don’t dismiss value investing, but there are many potential difficulties. One of the problems is what’s known as the value trap.
The value trap refers to stocks that appear to be bargains according to traditional measures of value but are in fact, very much overpriced. In other words, there’s a reason why they’re so cheap.
I think of the value trap each time I look at the major drug companies. It’s pretty remarkable how much these stocks have lost their appeal. For many years, stocks like Merck (MRK) and Pfizer (PFE) consistently beat the market. Not anymore.
So now we face the question, “are these stocks really cheap, or are they value traps?” I like these companies and I’m rooting for them, but so far, I’ve merely been an observer, not an owner. I’m just amazed at how everything Merck and Pfizer touch seems to turn to mud. Just a few weeks ago, Pfizer guided lower for the year.
Previously, I’ve said that I won’t go near either stock until I see some real improvement. I still feel that way. Right now, I’m watching for those little stories that ought to impress investors. For example, Pfizer raised its dividend by 26% a few weeks ago. That’s a good show of confidence.
Today, Merck finally has some good news. The company is guiding higher for the first quarter. The company now sees earnings of 61 cents to 67 cents a share for the quarter. Merck also backed its full-year forecast of $1.98 to $2.12 a share. That’s not bad.
The stock is trading near its 52-week high, but I’m not concerned about that. The past 52 weeks haven’t been that great for Merck. Also, I don’t worry about picking the exact bottom of a stock. I can live with missing the first move. I’d rather focus on the following couple hundred percent.
At the beginning of the year, I made a casual observation that I thought Merck would outperform Pfizer this year. I still think that will happen. Today is a good day for Merck. I hope to see more in the future.
I can’t leave this subject without saying something about Johnson & Johnson (JNJ). This may be the best buy in the large-cap end of the sector. I probably would have added it to my Buy List this year if not for the Guidant deal. That was a stressful few weeks, complete with the spectacle of Guidant suing J&J after Guidant did everything it could to ruin the deal. Now Guidant is someone else’s problem.
Johnson & Johnson reports its earnings two weeks from today. The current estimate is for 98 cents a share. This could easily be a $70 stock.

Posted by on April 4th, 2006 at 12:35 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.