Few investors have been rewarded more generously since the depths of 2009 than Eli Lilly (NYSE:LLY)'s. When the stock market reached its Financial Crisis bottom, LLY barely held above $27 a share. Yesterday, it exceeded $295 for a 992% return, not counting the dividends. Especially for a pharmaceuticals major, such gains are nothing short of spectacular.
Can we expect more of the same going forward? The company is profitable, growing and financially solid. The sad truth, however, is that past results are not indicative of future performance. There comes a time when even the best business can be a bad investment. It all depends on the price you pay. Those, who bought Microsoft (NASDAQ:MSFT) at $60 a share in 2000 had to wait 17 painful years just to break even.
Now, at $290 a share Eli Lilly is trading at 30 times its 2023 EPS estimates. In our opinion, paying such a high multiple carries a big risk of underperformance, especially for an already-huge $260B company. And if LLY’s stretched valuation is not enough to convince you to stay aside, its Elliott Wave chart gives you another reason.
The progress made by the bulls over the past 13 years resembles a textbook impulse still in progress. Waves (1) and (2), as well as waves 1, 2 and 3 of (3) seem to be in place already. It is interesting to notice that the five sub-waves of waves 1 and 3 of (3) are also visible. The 4-hour chart even reveals that wave iv of 3 is a very clearly running a flat correction.
If this count is correct, the pattern is now headed for a sequence of fourth and fifth waves before it is finally over. In a typical sign of exhaustion, the upcoming pullbacks in waves 4 of (3) and (4) can make the trend more choppy and overlapping. Nevertheless, it appears $350 a share is a reachable bullish target before Eli Lilly stock enters the negative phase of its cycle.