INVESTING: Drug stocks are out of favor-so snap up the bargains

One of the biggest companies in the world just dropped a bomb. Investors got scared. I am going to tell you why Wall Street took the news the wrong way, and what it means to one of the most important industries to consumers.

In the 1990s, Pfizer made a series of acquisitions that transformed the company into the second-largest drug firm in the world. Pfizer is worth about three times Eli Lilly’s market value. Until now, Pfizer employed more than 25,000 sales reps around the world. It is firing 20 percent of the sales force in this country, and an undisclosed number of reps overseas.

In reaction to the cuts, the stock took a little hit. Then it got smashed when the company announced it was halting research on a late-stage drug. A lot of people think they put two and two together and figured Pfizer had ramped up the sales force because it anticipated the drug receiving Food and Drug Administration approval. Without the drug, the sales reps weren’t needed. The stock lost more than 12 percent of its value, and that’s where the opportunity lies.

I know you think I’m out of my mind for talking about a health care stock with the Democrats only moments away from decimating the industry.

But what if the hype of the amount of damage doesn’t match the reality? The negative sentiment surrounding health care is as thick as I’ve seen for any industry in the last few years. The layoff announcement from Pfizer is a signal the industry is getting ready for a more challenging environment, but investors seem to be pricing in an inability for the industry to rise to the challenges.

Pharmaceutical companies are ripe for cost-cutting. My sister is a rep for AstraZeneca. A few years ago, it spent more than $20 million sending 3,000 reps to Hawaii for a week. The meeting could just as easily have been held in Newark, N.J.! To survive, these companies have to change. I’m thinking the Pfizer news means change is afoot, and it could lead to higher prices for the stocks in the short term.

When Pfizer got hit, a few things opened my eyes. First, the stock put in a low of $22 in July. The stock did not go lower after the election results, or after the company pulled the drug.

When this stock fell, buyers stepped in to buy. I don’t have an opinion either way about the long-term prospects, but at $25 a share, it sells for an 11 price-to-earnings ratio and pays a 4-percent annual dividend. These are levels that have offered support for other so-called value stocks.

Due to my penchant for lower volatility, I am buying the exchange-traded fund XLV, which tracks health care stocks. Pfizer is a big component of this ETF, so I indirectly own the stock. But I also like the industry in general. Expectations are way too negative right now, and for the next two months these stocks easily could trend higher. I’m only looking for a two-month trade, but similar negative circumstances brought the housing stocks to my attention a few months ago. And even though I advised getting out after only a small positive return, the home builders moved quite a bit higher recently. And, hey, after you sell the stock, the cash is yours.