Eli Lilly Stock Has Pulled Back 8%. History Says This Is What Happens Next.

Eli Lilly's (NYSE: LLY) shareholders shouldn't have any reason to complain. The big pharma stock is up 41% over the past 12 months and has more than doubled over the past three years.

But if you're looking for a crack in the armor, there's one to be found. Lilly's shares have pulled back roughly 8% in recent weeks. Don't make too much of this decline, though. History has a clear message about what happens next.

Behind Lilly's pullback

Perhaps the best explanation for Lilly's 8% pullback is the simplest one: Many investors are taking profits after a remarkable run. In August, Lilly's share price reached an all-time high following a 50% gain in less than four months. That kind of tremendous return in such a short period makes it quite tempting to take at least some money off the table.

Some might look for other negatives. Lilly CFO Lucas Montarce said on the company's second-quarter earnings call in August that U.S. prices for its products fell 3% year over year, with the decline driven by the GLP-1 drugs Zepbound and Mounjaro. Rebates and discounts cushioned this decline. Montarce noted that U.S. prices declined by 9% excluding those adjustments.

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Lilly's valuation could be another concern. Even after the pullback, the stock trades at 38.6 times trailing 12-month earnings. That's significantly higher than the 23.6 trailing earnings multiple for the S&P 500 (SNPINDEX: ^GSPC).

However, worries about Lilly's product pricing and valuation are likely overblown. The overwhelming demand for Mounjaro and Zepbound continues to push sales higher and makes price declines almost irrelevant. This growth also gives Lilly a much more attractive valuation: the stock's forward earnings multiple is 24.4.

History points to a rebound.

Whatever the reason for Lilly's recent pullback, history points to the likelihood of a strong rebound. During the past 10 years, the stock fell by at least 8% more than 20 times. And Lilly still delivered a return of more than 14x during the period.

Wall Street remains overwhelmingly bullish. Of the 23 analysts who have given ratings for Lilly over the last three months, 20 rated the stock as a "buy" or better. The consensus 12-month price target reflects a potential upside of around 16%.

The bottom line is that Lilly's recent decline isn't a story about a broken investing thesis. Instead, it's a story about a stock catching its breath after a historic run.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly. The Motley Fool has a disclosure policy.