I haven’t blogged about my personal financial situation much recently. I’d been unemployed for a while earlier last year and had kinda lost my writing mojo. However, my 38th birthday rolled around earlier this month so I’ve been taking critical stock of my situation.
After some thought I dumped everything in my ROTH IRA. I sold all my individual stocks as well as the mutual funds I’d been holding. Once the trades settled I had $44,000. I put all of it on Pfizer.
1. The Greying of America. Like most other industrialized countries the United States is getting older. As a percentage of the total population there are more and more people over 65. This should continue until the effects of the baby boom have worked their way through the nations demographics. Senior citizens are more likely to be heavy users of pharmaceuticals and in fact account for 33% of industry sales. So there will be more seniors buying lots of meds.
2. Diverse Product Base. Pfizer is one of the worlds largest drug manufacturers. It sells tons of different kinds of pharmaceuticals for all sorts of needs globally. They have segments which focus on primary care, consumers, gerontology, prescription and even animal health. Pfizer sells in Asia, Latin America, the Middle East, Eastern Europe, Africa, Turkey and Central Europe. In short they have a globally diversified business.
3. Favorable fundamentals. Pfizer has increased its income applicable to common shares consistently over the past three years. Its 5 year gross profit margin was between 74% to 80% annually. In 2012 the company netted something like 47 billion dollars in profit. In short, they are making serious cash.
4. Favorable political climate. With the passing of ObamaCare, the U.S. Federal Government has basically ensured that 32 million previously uninsured Americans will receive medical coverage. A good chunk of those 32 million will need drugs – so the political climate for the pharmaceutical industry in general is favorable, if not for Pfizer specifically. (As a side note, Pfizer is also owned by several members of congress and is therefore unlikely to be subject to unfavorable regulation).
5. Favorable Technical and Fundamental Indicators. The stock looks good from both a technical and a fundamental standpoint. From a technical standpoint the one year trend line (see below) shows a steady upward movement in price. Approximately 74% of the common stock is owned by institutional investors. This means that the smart money on wall street currently favors the issue. From a fundamental standpoint the stock pays a 3.1% dividend and has a price to earnings ratio of 16. The PE of 16 in particular is favorable to competitors like Novo-Nordisk A/S ADS or Merck. So, basically even at current prices ($31.00) the stock looks moderately priced relative to the industry.
Why put everything on one stock?
First, you need to take some risks to have any gain. Modern portfolio theory dictates that adequate diversity brings both optimal return and lower risk. That said, most of the really supercharged wealth builders I know of – guys like Ray Daylio, Peter Lynch and William O’Neil – have all focused their time and efforts. So diversification does work, but it may be impossible to get anywhere in the stock market unless you take calculated risks.
Second, my financial circumstances and values merit the risk. If you’ve been following our blog you’ll know that my wife and I have a net worth somewhere north of $800,000 (clicky). This means that $44,000 is approximately 5% of our total overall wealth. So, I could lose the entire investment and it would make zero impact on our lifestyle. The bills would still get paid and our savings would still happen. More importantly, I want to be rich. Wealth has a number of desirable characteristics, including increased longevity, higher life satisfaction, more power, improved health, better quality food, elevated social admiration, etc. This won’t happen unless we can make our net worth grow quickly and substantially.
As an aside note, investing in Pfizer may not be all that risky. The company has a very large capitalization, has a stable business and is well regulated by the Federal Government. Perhaps the greater danger is that the stock underperforms the S&P 500.