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Pfizer shouts its message to the world

Today's Financial News - Posted January 5, 2009

Pfizer (NYSE:PFE) and Big Pharma are sending a “secret” message to investors today. What does it all mean and how can you make money using the signals sent to Wall Street?

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): If you want to make money in today’s market with its super-efficient flow of information, you need advanced insight. Remember, this is not your father’s buy-and-hold stock market.

Sure, crunching a few ratios and digging into a company’s balance sheet and income statement will give you a strong head start, but if you want to truly excel, you have to understand the psychological side of Wall Street.

For a perfect example, check out the headlines surrounding Pfizer (NYSE:PFE). The company went out of its way to tell reporters this morning that it is open to acquisitions of its rivals, big and small, if they will lead to revenue growth.

Well, duh. What company is not open to acquisitions if it will increase shareholder value?

There is much more to this story. The headlines are only an invitation to dig deeper.

No need for a crystal ball

Fortunately, you do not need an ultra-secret Wall Street decoder ring to figure out what is happening. All you need is an understanding of signaling theory.

The notion behind the influential theory is the idea of asymmetric information. There are unequal flows of knowledge in the investing world. In other words, a company’s executives and insiders know more about the company than even the most well-connected investor.

Signaling is a very important variable for dividend investors. A company’s willingness to expand or continues its dividend “signals” that the top brass has confidence in its future earnings potential.

But what is going on when a company’s CEO picks up the phone and tells the world it is willing to buy its rivals? Unfortunately, it is not a positive signal.

Pfizer’s performance over the past five years has been less than stellar. An investor that put $100,000 into the company in January of 2004 would have a position worth just $50,000 today (excluding dividends).

The company, and its Big Pharma kin, have had more than their share of troubles recently. Research and development costs are soaring, insurance companies are tightening the healthcare noose and generic competition is heating up. That means revenue growth is stagnant and margins are decreasing. It is not a recipe for shareholder profits.

Read between the lines

By telling the world his company needs a large acquisition, Pfizer’s CEO, Jeff Kindler, is signaling that 2009 will not look any different. The only way the mature company will grow is by purchasing the growth.

That means shareholders are going to take a hit and possibly a sizeable one, at least in the short-term. Smart investors will heed the warning of today’s signal and take appropriate action.

As I write, shares of Pfizer are closing in on the $19 mark, nearly 20% off their 10-year low reached in late November. The recent surge could be setting investors up for a drastic near-term reversal, especially if more merger news hits the press.

Basic investors should do their best to avoid a position in Pfizer. Investors with a bit more tolerance to speculation should take a look at a short position on the equity or some mid-term put options. As this story develops, Pfizer’s woes will only increase.

Keep an eye out for more news on the situation. Pfizer may be a bad choice, but the companies in its acquisition sights will be good investment targets.

I am positive we will have more “signals” in the very near future.


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Posted by Andrew Snyder · Filed Under Featuring..., US Stocks and Markets 

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