Which Pharmaceutical Company is the Best Investment?
Written by
James Holbach
Edited by
T. Woods
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Picking out individual stocks is never an easy task. Businesses are complicated systems — what makes one stock a better choice than the other? For example, if you wanted to invest in a pharmaceutical company, should you go with Pfizer (PFE) or Johnson and Johnson (JNJ)? It’s impossible to declare with certainty which stock will be the winner, but there are some things to look at that can help guide the decision.
Growth Potential
A company’s future growth prospects — or at least the market’s perception of those growth prospects — is one of the biggest factors in how stocks get priced in the market. Since PFE and JNJ are both mature businesses, neither is likely to be poised for meteoric growth, but it’s still worth looking at. The easiest way for retail investors to get a handle on the outlook for a stock is to look for the average analyst growth rates — investment firms and research companies employ analysts who specialize in following a specific company, and their estimates are usually fairly accurate. Analysts currently are projecting an average annual growth rate of 4.84% for JNJ over the next five years. Pfizer, on the other hand, is actually projected to contract, with a growth rate of -1.23% over the same time frame. Â
Valuation
The reason that valuation is so important to consider is that ultimately the price you pay will determine the return on your investment. The best businesses in the world could still be a bad investment if you overpay. One of the most common valuation metrics used for stocks is the price to earnings (P/E) ratio. JNJ currently trades at a trailing twelve month P/E ratio of around 10.5, which is a pretty reasonable valuation for a high-quality company. Pfizer’s trailing twelve month P/E ratio is negative, indicating that it has actually been operating at a loss over the last twelve months.
Edge: Johnson and Johnson
PFE and JNJ are both high quality companies, but based on their growth prospects over the next five years and current price relationship to earnings (or losses) JNJ looks like the better choice right now. That might not be the case in the future. Things change fast in the stock market — be sure to do your own research before investing.
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