Friday , 23 August 2019


5 Undervalued Healthcare Stocks With From 28% to 104% Upside Potential

…While most segments skyrocketed by 20-30%, or more since the December bottom, healthcare has rebounded by a very modest 6%. This relative underperformance has caused several high quality names to become remarkably cheap. Furthermore, healthcare’s defensive nature is a very beneficial element, as market participants are likely to rotate into this segment going forward. This phenomenon will allow for multiples to expand, which should then enable healthcare equities to go substantially higher. Here are 5 such undervalued healthcare stocks to consider owning.

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5 Undervalued Healthcare Names

While the average company in the S&P 500 trades at around a 22 P/E multiple, many high-quality healthcare companies are trading at far lower valuations (7-10 times earnings).

1. Bristol-Myers (BMY)

Despite BMY reaching a high of around $70 in mid-2016, the stock has rolled back by 36%, all the way back down to $45, about where it was 5 years ago…and now sits at a rock-bottom multiple for no real apparent reason. I would argue that we are likely near a bottom, as BMY is trading around multi-year support…

BMY:

  • …has a trailing P/E ratio of just 11.3, and its forward P/E is at a remarkably low 10.1,
  • pays out a solid 3.44% dividend,
  • is expected to provide 6.6% YoY revenue growth, and
  • is expected to provide an EPS growth rate of 6%,
  • has shown a tenacity to consistently surpass analysts’ EPS forecasts…[so] it is very plausible/likely that the company can continue to surpass analysts’ consensus figures going forward and this is why I expect the company can earn around $5.11, 15% above consensus estimates… 

BMY is vastly oversold right now…indicating a very likely shift towards a much more positive tone in technical momentum. Most notably, the full stochastic, as it curves up and prepares to break out above the 20 level, is extremely bullish and suggests BMY may be much like a coiled a spring right now.

The one-year chart above illustrates what appears to be a clear double or a W-shaped bottom forming in BMY. Given the technical and fundamental/valuation evidence, I expect the stock will rebound and go substantially higher from here.

…Despite BMY’s stock price being essentially at the same level it was 5 years ago, the company’s revenues increased by about 40%, from around $16 billion to over $25.5 billion over the last 5 years. Moreover, gross profits also increased substantially. Gross profits increased by roughly 37% over the past 5 years.

2. Gilead (GILD)

Gilead is an essential pillar of the medical community as the company produces drugs for various life-threatening conditions and has numerous drugs about to go through the approval process yet, incredibly:

GILD:

  • has a trailing P/E ratio of only a 9.3,
  • has a forward P/E is just 8.9,
  • distributes a 3.88% dividend, and
  • is expected to deliver revenue growth of 2.6% next year.

Gilead is extremely undervalued relative to analysts’ 12-month consensus estimate at $84.50 so, with…the stock currently trading at $62,it implies that shares would need to rise by 36% just to achieve consensus estimates, and by more than 50% to get to its higher end estimate figures.

We see that GILD made a long-term bottom in mid-2017. Since then, the stock has been in a trading range from about $60 to $86. Right now, the stock is at $62.74, so it is essentially at the very bottom of its multi-year trend. Also, it appears like GILD made a long-term W-shaped double bottom at the end of last year and is in the process of making a slightly higher high as healthcare names bottom and reverse recent bearish trends.

3. AbbVie (ABBV) has:

  • a trailing P/E ratio: 9.74,
  • a forward P/E (based on consensus estimates) of 8.16,
  • a dividend of 5.3% and
  • revenue growth of 5.7%.

ABBV is also quite undervalued relative to analysts’ consensus estimates. Higher-end estimates suggest ABBV would need to appreciate by over 75% to achieve its higher $137 price target. This highly discounted enterprise appears to be overlooked and largely ignored by the market.

4. Celgene (CELG) has:

  • a trailing P/E ratio of 10.5,
  • a forward P/E (based on consensus estimates) of 7.3,
  • no dividend and
  •  revenue growth of 12.7%.

With such a rock-bottom valuation, it is no wonder estimates are substantially higher for Celgene, with higher-end targets going up to around the $130 level, roughly 40% above Celgene’s current price.

5. Biogen (BIIB) has:

  • a trailing P/E ratio of 8.6,
  • a forward P/E (based on consensus estimates) of 7.5,
  • no dividend and
  • revenue growth of 2%.

Biogen is currently around 10% below consensus price estimates, and is far below higher end targets

Healthcare is also Essentially Recession-Proof

Healthcare is a noncyclical sector, and many companies should continue to do extremely well even during times of an economic slowdown or a recession.

  • People will always need medicines,
  • the sector is highly subsidized,
  • and the high-quality companies in this space are extremely unlikely to see meaningful revenue or EPS declines, even in a slower economic environment.

Therefore, the healthcare segment looks extremely attractive here, especially from a long-term perspective…

Summary

There is no reason why healthcare multiples can’t expand moderately from these rock-bottom valuations. After all, historically, many of the underlying names have traded at substantially higher multiples (17-20, or higher). Therefore, even at 13-15 times estimates, healthcare stocks will remain amongst the cheapest names in the market and are still relatively cheap compared to past healthcare valuations.

Here’s what the above 5 stocks look like trading at 13-15 times forward earnings:

  1. Bristol-Myers: current price – $45, price at 13 times forward earnings $57.70, price at 15 times forward earnings $66.60. In percentage terms: gain of 28-48%.
  2. Gilead: current price – $63, price at 13 times forward earnings $90, price at 15 times forward earnings $104. In percentage terms: gain of 43-65%.
  3. AbbVie: current price – $78, price at 13 times forward earnings $122.60, price at 15 times forward earnings $141.45. In percentage terms: gain of 57-81.4%.
  4. Celgene: current price – $93, price at 13 times forward earnings $164.6, price at 15 times forward earnings $190. In percentage terms: gain of 77-104%.
  5. Biogen: current price – $230, price at 13 times forward earnings $388, price at 15 times forward earnings $448. In percentage terms: gain of 69-95%.

Bristol-Myers is great because it provides a stable dividend, and the stock has ample room for upside potential. Gilead and AbbVie are also great companies with substantial upside potential. Celgene and Biogen, while being slightly riskier, have the most upside potential, in my view, but do not offer a dividend….

Editor’s Note: The above excerpts* from the original article have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement. The author is receiving compensation from Seeking Alpha for pageviews of his original article as posted there so please refer to it for the unedited version.]

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(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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