Recently we've sold all our stake in Eli Lilly, and have been advising our clients to do so. With this sale (and recent trims), we're locking in on average a nearly 25% gain. In this post, we would like to explain our decision.

We are booking profits on our Eli Lilly position because we have been feeling a bit "piggish" about the stock’s strong move year to date. Remember the great investor Jim Cramer says "bulls make money, bears make money, but pigs get slaughtered." Eli Lilly has been a great win for the portfolio this year, with the stock gaining about 9% against the S&P 500 which has fallen about 7%. However, the outperformance is only justifiable on a macro-economic, sector-based basis. Eli Lilly is in the healthcare/pharmaceutical sector, which is the exact type of defensive play that investors love when they are worried about a Fed-mandated slowdown/ economic recession. Take out any Wall Street playbook and you will see this phrase in there: into a recession, buy healthcare. We wrote about that at the end of last year (here and here), defended our Lilly pick when it was down, stuck with it and came out well on the other side.

But that's about the only thing that has been driving Lilly's stock up in a nearly straight line: fears of an economic slowdown. The company has not released earnings, drug pipeline news, nor there has been any bullish analyst reports in the past 1.5 months during which the stock has rallied ~30%). With the stock’s latest move above $300, Eli Lilly now trade at a robust 35 times forward twelve-month earnings estimates. For the past 10 years, the average forward P/E has only been ~19.5 (see image below). As much as we like LLY for the long term and want to own it, we must also recognize that the stock's valuation is extended here, and respect the possibility that a lot of good news has been priced in. Due to these conflicting forces, we believe the prudent move is to trim our position now, wait for the stock to get hated again like it was just a couple months ago, and start picking it up then. 

All that valuation aside, Eli Lilly is still one of the best growth healthcare company in the world. The company owns one of the industry’s most valuable pipelines, home to a revolutionary obesity/diabetes drug and a potentially groundbreaking Alzheimer’s treatment. There is also a margin expansion story here: just last week Barclays estimated Eli Lilly’s operating margins could expand to 41% in 2025 from 32% in 2022.