Love Your Pit Bulls, Not Your Stocks

Many years ago in Baltimore, the pet of choice among the widespread criminal element became the pit bull, because, among other marvels, it is a scrappy dog that can fit easily into a duffel bag full of cash. Noticing that criminals were enamored of the breed, regular folks, aspiring to be like the criminals, also began to adopt pit bulls as their representatives of man's best friend; finally, a few of the criminals went to jail or died in gun fights, and many of the regular folks who had pit bulls as family pets lost their homes or could no longer feed those big, hungry mouths. Now pit bulls roam the alleys of Baltimore as strays, waiting to be adopted by the few people who do not already own too many pit bulls. I have heard that your pit bull will steal your heart, and I agree that a pit bull might steal your still-beating heart with its angry jaws someday and swallow it with a quart-of-warm-blood chaser.

I suppose there should be an economic indicator that measures the number of stray dogs in cities across the U.S. With that statistic perhaps we would find a positive correlation between numbers of strays and economic stress felt by families. At the risk of mistaking correlation with causation, I would like to suggest that I have received fewer emails lately from neighbors and friends about stray dogs and, in particular, pit bulls. My sense is that in my city the economy is improving modestly in Baltimore, and if it is improving here, perhaps the economy is also improving around the country, where people also love their pit bulls.

I have never loved the stock Pfizer (PFE), but I have like it well enough. Wall Street hates Pfizer. I first traded PFE about 6 years ago when the company had fallen out of favor with investors because of the looming patent expirations of blockbuster drugs like Viagra and Lipitor, the former in 2012 and the latter later this year. Investors priced into the stock the loss of earnings on those drugs early. I bought PFE at an average purchase price of $24 and sold it at about $28, so the trade was a positive one but nothing to get too excited about. When the stock dipped again soon thereafter, I bought again and have held the stock ever since. The stock is hated and has been for about seven years or more. I like that part; the more hated a stock is by the investment community, the more, in general, I like the stock. A hated stock is always under-owned, and we want to buy stocks that are under-owned and then sell them back at a profit to the fickle traders who sold us the shares. Currently, PFE trades at around $20 and dipped into the mid-teens as recently as summer 2010.

What I find interesting about PFE is its under-owned status and its potential to generate dividend income for its investors. The quarterly dividend is $0.20, about 4% annually at the current share price. The company had to cut its dividend years back from $0.32 to complete the mammoth purchase of Wyeth. Since then Pfizer has been interested in raising its dividend as quickly as possible; it won't return to $0.32 any time soon, but we may be surprised by what future blockbuster drugs Pfizer will patent. Wall Street has been trading Pfizer as though the company will never again produce a significant drug, which is a ridiculous assumption. Furthermore, Pfizer has been restructuring and cutting costs to ensure that the dividend will increase or, at the very least, remain steady, and that will help the share price.

There are a few technical hurdles, however, for Pfizer with respect to its stock chart. For example, the chart shows the stock may be stuck under $21 for a few months at least. A double top is when a stock reaches a certain stock price, the top, then falls back only to make another attempt at exceeding the top again but fails and falls back again. Of course, you can have triple tops and quadruple tops and many-many-uple tops. The higher the uples, the more difficult the stock will have breaking out above that top, and that's bad for you if you own the stock because the top serves as a cap for the stock's price, especially in the short term. Why do we know this? Statistics. A double top decreases the probability that the stock will break out above the established top's resistance. A triple top decreases the probability further, and the higher the number of the top, the more difficultly the stock will have overcoming it from the standpoint of probability. See if you can see the tops in Pfizer's recent chart.

PFE's three-month chart looks terrible, but the company's prospects are improving.

Oh, so many tops. There is resistance at and below the $21-level. Here is another reason traders won't touch this stock: the more-than-triple top, a death knell for a stock according to traders. Still, using tops to identify resistance for a stock can be misleading. For example, the statistics only holds the stock below an established top if there is no big news to drive the stock past the resistance. For example, if Pfizer released news next week of FDA approval of a new potential blockbuster drug, the stock would pop and break through this $21 resistance level. Also, good news for the overall market might also help PFE over the $21 hurdle, but with the many worries we face near the end of the summer (for example, the U.S. debt ceiling, the European debt woes, etc.), a general stock market surge is unlikely until closer to the end of the year.

But there's a benefit to tops that many traders ignore, namely, that a stock tends to try to break its resistance at significant tops many times before it actually succeeds, so PFE presents an excellent short-term trading opportunity if it dips significantly below $20. You can buy the stock, for example, with a 19-handle and then sell it when PFE tries to break $21 again. If you had used that strategy many times during the past few months, you would love PFE, perhaps more than your pit bull. If PFE ever drops to the $17 or $18 level, I will add to my position significantly. Otherwise, I will hold the stock and collect 4% annually waiting for the stock to blow its top, which will happen, I think, within the next two years.