Big pharma is like the beautiful mythic siren. Calling calling until you turn your boat and flounder on the rocks just below the waterline. Society gets sick and needs drugs. Great business model what could be better as a defensive play with excellent growth prospects.
As in any grouping there are winners and losers. Some stocks are better. The problem is they all face the same issues. Patents constantly expiring and then facing generic knock off price competition. What anomaly stands out and should we pay attention.
Dividend yields are very similar ranging from 2.91% to 3.4%
PE ratios range from 19.2 to 22.5
Short Interest Ratio as a % of outstanding float tells a different tale.
Bristol-Myers Squibb 1.96%
Interestingly enough Novartis with the smallest short sale ratio has the highest dividend yield and lowest PE ratio. Dividends do prop up stock valuation. But consider it this way short selling is like a tide; goes in goes out goes in goes out. The higher the short position the more bullish because all shorts must eventually cover.
So Novartis has no bullish short position. Dividends are high and therefore will be increased aggressively. Management will try to conserve cash. The shorts do not smell a correction as yet but the higher dividend yield frequently identifies the stock with the higher propensity to move upward. The lowest PE ratio encourages investors to believe there is room to bid up the price. The shorts as yet are not betting against the story. But as the stock rises upwards the short position will increase. Counter-intuitive counter-cyclical. then when the stock taps out the momentum drops and shorts cash in.
So in the very near term the stock should be facing upward action. Just as an elevator goes up with counter pulleys and cables pulling in the opposite direction the stock will peak and start a descent warming the heart of the short selling community. Watch the short selling position and you’ll know the end is near.
George Gutowski writes from a caveat emptor perspective.