This Dow Stock Is Crazy Expensive – So of Course Robinhood Loves It
Hope and enthusiasm do not typically produce sound investment decisions, and retail buyers are notorious for piling into stocks with dubious fundamentals. | Source: REUTERS/Brendan McDermid
- Pfizer is the hottest stock on Robinhood over the past 24 hours.
- Positive news about a vaccine drove the Dow Jones component 5% higher on Wednesday.
- Robinhood traders might be too enthusiastic about Pfizer’s outlook.
Robinhood traders are falling in love with Pfizer stock (NYSE: PFE). They started piling into the Dow Jones Industrial Average component on Wednesday after positive news about a vaccine.
Pfizer Just Became the Hottest Stock on Robinhood
In the past 24 hours, more than 40,000 new Robinhood traders bought shares of Pfizer, according to data from Robintrack .
That made it the most added stock on Robinhood, outrunning both Microsoft (NASDAQ: MSFT) and Tesla (NASDAQ: TSLA) on the heels of their earnings results.
Pfizer jumped 5% on Wednesday after the company announced that the U.S. government had placed an initial order for 100 million doses of the virus vaccine it is developing with BioNTech (NASDAQ: BNTX).
The government agreed to pay $1.95 billion for the vaccine if it proves to be safe and effective.
Pfizer’s gains drove the Dow Jones higher, powering it narrowly past the 27,000 level before the closing bell.
Why This Dow 30 Member Is Overvalued
Retail trading has surged in recent months as the stock market recovered from the pandemic crash in March.
Speculators crammed into bankrupt companies, trendy tech stocks, and especially electric vehicle manufacturers.
And now they’re hoping a vaccine is a path to easy riches.
Robinhood traders are perhaps a little too enthusiastic regarding Pfizer. There’s still a long way to go before its vaccine becomes available. We don’t know yet if the drug will be effective.
Ed Yardeni, chief investment strategist at Yardeni Research, said in a note:
Typically, it takes roughly a decade for a new vaccine to go through the various stages of development and testing. However, the urgency of the pandemic … has resulted in a mobilization of global medical resources rarely seen before in human history. Billions of dollars, provided by both the public and the private sectors, are funding the global campaign to develop tests, vaccines, and cures for the virus.
But the next phase will be critical to demonstrate that the potential vaccines can protect against infections.
Pfizer’s rally seems to be based on enthusiasm and hope about the recovery. The same is true of the broader Dow Jones. If there’s any obstacle regarding the development of the vaccine, that could send the stock – and the index – lower.
Hope and enthusiasm do not typically produce sound investment decisions, and retail buyers are notorious for piling into stocks with dubious fundamentals.
With a price-to-earnings (P/E) ratio of 13 , Pfizer stock doesn’t immediately look that expensive. It’s ridiculously overvalued relative to its future earnings growth, though. Its price/earnings-to-growth (PEG) ratio is a disappointing 2.6.
The pharmaceutical company’s revenue and earnings are estimated to fall in 2020 by 5.3% and 2.7%, respectively .
While analysts expect growth to return in 2021, it seems prudent to avoid pricing in that growth this far in advance. Especially since so much of PFE’s present valuation is based on drug trials that could still fail.
Can You Feel the Deja Vu?
After all, we’ve seen this movie before.
Gilead Sciences (NASDAQ: GILD) was all the rage in April and May. It’s down 11% from its mid-year high.
Then investors dove into Moderna (NASDAQ: MRNA) following positive news about its vaccine. The hype collapsed when JPMorgan said the stock was overvalued .
The same thing could happen to Pfizer next.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author owns shares of Microsoft (MSFT).
