Merck's Stock Price Lags Behind Its Falling Fundamentals

The Green Zone Power Ratings system has been tracking the performance of Merck (MRK) and Bristol-Myers Squibb (BMY), two large pharmaceutical companies. In March, both stocks crossed paths in terms of their ratings, with Merck scoring 73 and Bristol-Myers scoring 71.

However, since then, Bristol-Myers has continued to climb, while Merck's score has fallen or stalled. This is a red flag for investors, as it suggests that the price of Merck's stock may be driven by speculation rather than fundamentals.

The Green Zone Power Ratings system scores stocks based on six factors: value, quality, growth, momentum, volatility, and size. Bristol-Myers excels in several areas, including quality (85), growth (83), and value (66). In contrast, Merck's score is dragged down by its low value rating of 5.

When the system flags a stock with an extreme value rating like this, it's worth checking the math to see if there are any underlying issues. After investigating, Matt Clark found that Merck took $6 a share in charges due to buying two smaller drug companies, Cidara Therapeutics and Terns Pharmaceuticals.

Even after stripping out these charges, Merck still trades at a high multiple of earnings, with analysts expecting it to earn $8.70 a share this year. In contrast, Bristol-Myers is priced more reasonably, trading at about 9 times earnings.