The Best Turnaround Stock to Invest $1,000 in Right Now

Even very well-run companies will eventually fall upon hard times. That's the backstory you need to keep in mind when you examine Bristol Myers Squibb (NYSE: BMY) and Pfizer (NYSE: PFE). Here's why contrarians and turnaround lovers will likely find Pfizer the better turnaround play.

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Comparisons are important

Benjamin Graham is often considered the father of fundamental analysis. A key tool he used was comparing competing investments. Simply put, the best way to get a feel for a company is to look at it relative to another company.

For example, how would you know that Eli Lilly's price-to-earnings (P/E) ratio of nearly 50 was high if you didn't have something to compare it to? The S&P 500 index's P/E is around 29. Bristol Myers Squibb's P/E is a touch over 17, and Pfizer's is just under 15 times.

To be fair, Eli Lilly is the leading drugmaker in the GLP-1 weight loss space today. So, there's a reason it is a relatively expensive stock. Pfizer, meanwhile, suffered a major setback in its own efforts to bring out a competitive weight loss product. It was forced to ink an acquisition, specifically around weight loss drugs, to fill out its pipeline so it could catch up to competitors. The company also just inked a licensing deal to market a weight loss drug candidate from a Chinese drugmaker, assuming it gets final regulatory approvals.

All in, these deals aren't exactly great news for Pfizer, but they show that management and the board of directors are willing to do what is necessary to get the business back on track. Bristol Myers isn't in as dire need of deals, but it, too, has used acquisitions to fill out its drug pipeline. In fact, the acquisition of smaller pharmaceutical companies by larger ones is pretty normal in the industry.

Nothing unusual is happening

That's actually a really important fact. Eli Lilly performing well because it has developed a new drug is normal. There's always a hot new product, and some drugmaker has to sell it. Bristol Myers and Pfizer being out of favor because they don't have hot new drugs is normal, too. In fact, it is a built-in aspect of the drug industry.

The cost to find, develop, and market a new drug is so high that drug companies are given patent protection on new drugs. However, patent protection eventually expires, which typically results in a steep decline in revenue and earnings from that drug. This is known as a patent cliff.

Pfizer and Bristol Myers Squibb are both facing upcoming patent cliffs, and investors are, not unreasonably, worried about the impact. Eli Lilly could have a decade or more before it faces a material patent cliff around its GLP-1 drugs. If history is any guide, however, Pfizer and Bristol Myers will likely both develop or acquire new drugs to fill out their pipelines.

From an investment standpoint, Bristol Myers appears to be a safer investment than Pfizer. For example, its dividend yield is nearly 4.8%, and the dividend payout ratio is roughly 85%. The payout ratio is a bit high, but there's a little wiggle room for dividend investors. Pfizer's yield is 6.6%, and its payout ratio is 100%. Notably, the company cut the dividend when it acquired Wyeth in 2009. That turns the recent acquisition into a dividend risk, despite its value to the business.

If you are looking for a contrarian income play in the drug sector, Bristol Myers Squibb is probably a more attractive option than Pfizer. But if you are looking for a turnaround and willing to take on extra risk, the better choice is probably Pfizer. The primary reason is that Pfizer's stock is down 55% from its 2021 highs, while Bristol Myers Squibb is down 35% from its 2022 high-water mark. Both companies are likely to survive, but Pfizer has more room to recover and is trading hands at a lower valuation.

The yield is not the story with Pfizer

Some investors may look at the high yield Pfizer is offering and think it is the better dividend stock. Given the high payout ratio, that's probably not the best risk/reward choice to make at this time. Income investors will likely be better off with Bristol Myers Squibb.

However, both companies are likely to survive their current headwinds and thrive over the long term. If you are willing to take on the risk of a turnaround story, spending $1,000 will get you around 38 shares of Pfizer. A more attractive valuation and more upside potential suggest an attractive risk/reward trade-off for more aggressive investors.

If the dividend survives, it's icing on the cake.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb and Pfizer. The Motley Fool has a disclosure policy.