While the stock market continues to show an upward bias, there’s some truth to the skeptics’ observation that the bull’s momentum is starting to show some trepidation. Such hesitation isn’t surprising at these levels — where the Dow Jones industrials had recently breached the 21,000 level — if only momentarily. To be sure, investors have reined in some of their enthusiasm.
The market has started looking at extraneous matters that could well trip up the aging eight-year old bull. Politics gave investors a huge boost right after the presidential election, but now the very issues that helped lift stocks are making investors impatient for some concrete, positive news from the White House.
Remember that saying about being stuck between the devil and the deep blue sea? Astute stock-picking avoids that problem by pinpointing stocks that are strongly ensconced in their respective markets and at the same time provide sizable total returns. In fact, certain sectors are particularly attractive because they’ve been embattled for various reasons and yet they abound with fundamentally sound companies.
One sector that’s been besieged on Wall Street is the pharmaceutical industry, which has been skewered on drug-pricing issues as several drugmakers have been accused of establishing unfairly exorbitant prices for their products.
Still, the drug industry has plenty of companies that have become attractive investment opportunities not only for their continued expansion worldwide but also for maintaining sustained sales and profit growth.
“When we look at the drug industry right now, we see a ton of opportunity for investment,” said Damien Conover, equity analyst at Morningstar. In his recent appraisal of the sector, he noted that a lot of large-cap pharmaceutical stocks are undervalued in spite of the market’s strong advance early this year. The concern among investors is whether the drugmakers will be able to continue hiking prices or be able to launch new drugs at high prices.
Conover said his research convinces him that it’s “very unlikely” that a Republican-controlled Congress will force drug prices to come down. “We think market prices will continue to drive the drug price equilibrium.“ Conover added that the current private-pay market, which is really controlled by the pharmacy benefit managers (PBM) industry, will continue to apply pricing pressure on drugs.
“We think certain areas have particularly strong drug-pricing power, most notably cancer, HIV, and MS [multiple sclerosis] drugs,” said Conover. These are areas where prices have held up very strongly in the past, and “we think they’ll continue to hold up going forward,” he said. The key to strong pricing power is innovation. “The more innovative the drug is, the better and the stronger pricing power that these firms will have,” argued Conover.
Three pharmaceutical stocks have the ideal combination in their operations, according to Conover: Pfizer (PFE), which is one of the world’s largest pharmaceutical companies; Roche Holdings (RHHBY), a leader not only in pharmaceuticals but in diagnostics; and Celgene (CELG), which develops small-molecule drugs for the treatment of blood-borne diseases, solid tumor cancers and inflammatory diseases
Pfizer, which appears to be the most durable and fundamentally advanced drugmaker, is still pegged by analysts to outperform the broader market this year despite some headwinds. Its hefty “3.9 percent dividend yield and superior grades for safety and financial strength further advance its overall investment appeal,” said Michael Ratty, equity analyst at Value Line.
Shares of Pfizer haven’t been sensational winners, but they have advanced steadily since 2014. Currently trading at $34.32 a share, analysts believe the stock will climb to between $36 to $40 a share over the next 18 months. That’s partly due new drugs in its pipeline and products gained from its recent big acquisitions, including Anacor, whose ointment for the treatment of eczema won Food and Drug Administration approve in December 2016. The drug is a potential blockbuster, according to Ratty. The ointment, called Eucrisa, is expected to produce peak sales of $2 billion.
Roche had a dismal start this year when its stock fell about 15 percent since January and now trades at $31.75. But some investors saw that as an opportunity to buy Switzerland’s leader in biopharmaceuticals and health care.
S&P Capital IQ (a unit of CFRA Research) analyst Jit Hoong Chan recommends Roche as a “strong buy,” noting that investors “aren’t fully appreciating Roche’s leading exposure to the fast-growing oncology drug market.” He noted that some investor concern involves the expiration of some older drugs. That worry is way “overdone,” he said.
“We believe that newer drugs will be able to pick up the slack,” said Chan. In 2016 alone, Roche launched five new molecular drugs, a historical high for the company, he noted. Roche is one of the leading producers of oncology drugs and has consistently demonstrated leadership in cancer treatments, said Chan.
Celgene is another drugmaker that has defied any pullbacks in the sector. Its stock has risen steadily since 2012, to $125.77 a share currently. Jeffrey Loo, equity analyst at S&P Capital IQ, recommends the stock as a “strong buy,” with a 12-month price target of $150 a share.
“We think Celgene has robust growth prospects and, importantly, its main product patents aren’t expiring for several years,” noted Loo. The stock is trading below peers’ comparable levels, and so he’s convinced that Celgene is way undervalued. Celgene is also a leader in its specialized fields, very much like Pfizer and Roche.