Don’t make it complicated. The Large Cap Pharma Industry usually looks like a solid investor niche. Place a few of your stock picking bets here.
Here’s the latest top-down data, which shows what I mean. In mid-June, the 15-company-strong industry has a Zacks Industry Rank of 44 out of 265 (that’s the top 17%). In recent weeks, covering analysts made 10 positive earnings estimate revisions and just 5 negative revisions to large-cap drug stocks. Broad, top-down tailwinds like this? I see them nearly every time I look into the pharma industry.
Furthermore, each time I write up the Zacks Monthly Market Strategy investor report, the Health Care sector lands in the top 3 or 4 attractive spots out of the 10 S&P500 sectors. No other S&P 500 sector is as consistently ranked so favorably.
Finally, the portfolio I run at Zacks -- the International Trader -- always attempts to have an overweight position in Health Care. Lots of these drug companies are based outside the USA for tax purposes. Many base operations in Ireland, where the corporate profit tax rates are favorable. Due to patent protection, cash flows are strong and positive on successful drug stocks.
As an investor, not a trader, there are 3 good fundamental reasons to own a drug stock---
(1) Aging demographics in advanced countries like the USA.
Final demand growth is everything behind the sustainability of industry revenue growth. If there is no rain and sun, there will be no green grass. The basic ingredients for rising drug demand – the frailties that accompany aging -- are going to be there for the next 2 decades.
(2) Drug stocks can pay a healthy dividend.
Two of the 3 stocks I list (below) offer dividends of 3.7% and 2.07% annually. When the U.S. 10-year Treasury trades at record lows, that adds a fixed income incentive to these stocks.
(3) Bigger pharma companies in the space buy smaller companies all the time.
That is (more often than not) how the large-cap drug companies grow. There is a real chance to score a sizeable merger stock premium, when you hold the right shares of an acquired smaller drug company. The final stock I picked is a smaller, though not too small, drug growth stock based in Denmark.
3 major Pharma stocks the Zacks Rank system identified for you—
Pfizer (PFE - Analyst Report) ): This $210 billion market cap monster drug company gets a Zacks #1 Rank (Strong Buy) and a Zacks VGM score of C. The Zacks Value is C and the Zacks Growth is C. The PEG ratio is high at 2.67 here. This is a well bid stock.
They report again on July 26th. The Zacks Consensus estimate is for $2.46 a share in 2016 and $2.66 a share in 2017. In the last 60 days, there have been 9 positive EPS revisions and no negative revisions. The company has met or barely beat on quarterly EPS reports the last 4 times at bat, with an average surprise of +3.7%.
Hospira, Warner-Lamber, Upjohn, Parke-Davis and more are rolled up into this M&A-built drug conglomerate. The stock offers a 3.40% dividend.
Pfizer Inc. is a research-based, global pharmaceutical company. The Company's diversified global healthcare portfolio includes human and animal biologic and small molecule medicines and vaccines, as well as nutritional products and consumer healthcare products. Pfizer's Animal Health business unit discovers, develops and sells products for the prevention and treatment of diseases in livestock and companion animals.
Pfizer Inc. is headquartered in New York City, NY.
Bristol-Myers Squibb (BMY - Analyst Report) ): This $120 billion large-cap pharma stock gets a Zacks #1 Rank (Strong Buy) and has a Zacks VGM score of D. The Zacks Value score of D and Growth score of F shows that this stock, like all big pharma plays, is already well bid. However, the PEG ratio is only 1.30. Anything below 2 is OK on a forward look, incorporating growth into the valuation.
They report again on July 28th. The Zacks Consensus estimate is for $2.60 a share in 2016 and $3.33 a share in 2017. In the last 60 days, there have been 12 positive EPS revisions and no negative revisions on this stock. The last 4 quarterly reports have produced 4 positive surprises, averaging a nice +28% each time. The stock offers a 2.09% dividend.
Bristol-Myers Squibb Company is a global leader in the research and development of innovative lifesaving and life-enhancing treatments for heart disease; high blood pressure; stroke; diabetes; cancer; HIV/AIDS and other infectious diseases; depression, schizophrenia and other mental disorders; pain; and other conditions.
Bristol-Myers Squibb is headquartered in New York City, NY.
H Lundbeck (HLUYY - Snapshot Report) ): This is a $7 billion market cap pharma company. It holds a Zacks #1 Rank (Strong Buy) and has a Zacks VGM score of D. The Zacks Value score is F and the Growth score is A. That shows you this stock is very well bid. Only buy this one on a pullback down the road somewhere.
They report on June 15th. As a European stock, the analyst coverage is very light. The one analyst in our system thinks EPS will be $0.95 this year and a $2.03 whopper next year. This smaller growth stock, predictably, offers no dividend. It prefers to use its cash to fund its strong growth.
H. Lundbeck A/S is an international pharmaceutical company engaged in the research and development, production, marketing and sale of pharmaceuticals across the world. Its products are targeted at disorders like depression and anxiety, schizophrenia, insomnia, Huntington's, epilepsies, Alzheimer's and Parkinson's diseases. The Company is involved in the development of new and improved drugs for the treatment of psychiatric and neurological disorders.
H. Lundbeck A/S is headquartered in Copenhagen, Denmark.