Going Bottom Fishing on a Beaten-Down Big Pharma

One of the things I like most about covered calls is they can be used for a variety of purposes. I use them extensively for downside risk mitigation when I feel the market is significantly overbought, as I do now. 

Covered calls can also be deployed profitably on names where you see long-term value but that have become range-bound for some time, such as Exelixis EXEL and Dynavax Technologies DVAX, both of which I have written about frequently in my columns the past couple of years. 

Another way covered calls can be used is to do some "bottom fishing." It's a method to accumulate a position in beaten-down names that should do okay once sentiment turns around for them. Let's focus our attention on this strategy today.

For a core member of Big Pharma, Pfizer PFE certainly has given shareholders a wild ride in recent years, one more common for the small-cap biotech area. The stock soared during the worst years of the Covid pandemic thanks to massive profits, first from its mRNA vaccines and then from its Covid treatment, Paxlovid. 

However, vaccine revenues have plummeted as the coronavirus became endemic and Paxlovid never worked as well as projected. Pfizer also faces a couple of key patent expirations in the coming years (Ibrance and Prevnar 13) after previous expirations of drugs such as Lipitor and Viagra.

The shares have been trying to find a bottom in recent months and there are some reasons to believe a Pfizer turnaround could be on the foreseeable horizon. To start with, the shares have a current dividend yield of more than 6%, which should put some sort of floor under the equity. The company has also used its profits from the Covid years to expand its pipeline and product portfolio via a series of acquisitions, most notably the $43 billion purchase last year of oncology focused Seagen.

The company posted earnings per share of about $4.50 in 2021 and better than $6.50 a share in 2022. However, profits plummeted in 2023 as the Covid gravy train ran out of gas and EPS slipped to around $1.70. Still, earnings should start to rise again over the next couple of years on sales growth in the low single digits. Current analyst consensus estimates have Pfizer earning just north of $2 a share in 2024 followed by $2.50 in 2025.

Currently at around $26.00, the stock trades for roughly 10 times 2025 EPS estimates, with a yield of 6.5%. That makes this Big Pharma a nice value in an overbought market. 

This is how I plan to bottom fish and accumulate shares in PFE over time or pick up a decent return in a name that seems to have little downside here.

Option Strategy

Here is how one can initiate a position in PFE utilizing a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.

Selecting the August $26 call strikes, fashion a covered call order with a net debit in the $24.40 to $24.45 a share range (net stock price - option premium). Liquidity is excellent with the options against this equity. 

This strategy provides downside protection of 9% over the trade’s duration, which includes three quarterly dividend payouts of $0.42 a share. 

The strategy also provides a potential return of just under 10% return, including dividends, even if the stock trades even over its approximate five-month option duration.

At the time of publication, Jensen was long DVAX, EXEL and PFE