Beaten-down sector showing positive signs that could lead to a rally.
Investing is about looking forward. Most folks think that simply means taking a company’s existing trend and extrapolating it indefinitely into the future.
But it’s not that simple. A company that’s been on a big growth swing could suddenly stall out. Or a company that’s been having a few rough quarters could finally succeed in turning it around. This happens in everything from individual stocks to sectors, to the market as a whole.
One sector that looks terrible right now, but could likely beat the market going forward, is the healthcare space. A perfect storm is weighing on prices, but the sector is doing fine—and is even shaping up to beat the market going forward.
Here are three top picks in this oversold space:
Pick #1: Johnson & Johnson (JNJ)
A manufacturer of everything from baby powder to mouthwash to band-aids, Johnson & Johnson has been in some difficulty due to a number of high-profile lawsuits stemming from products containing opioids and asbestos. That’s weighed on shares, which have under-performed the stock market by 10 percent in the past year.
However, the company has been working to settle the lawsuits and bundle many of them up to avoid years of potentially costly litigation, akin to the settlements the tobacco companies made with the government in the 1990’s. Although the company’s revenues are down, earnings are up substantially, and the company’s total profit margins have increased to over 20 percent.
With shares trading around 15 times forward earnings, they’re not at a bargain-basement price, but they’re cheaper than the average S&P 500 stock and have room to head higher, with a 20-25 percent gain to just move in line with the current average valuation.
In the meantime, the company just increased its dividend to $3.80 annually, for a 2.8 percent yield right now. The company’s long-term dividend growth is perfect for investors still looking to buy and hold. Consider shares up to $140.00.
Pick #2: Teva Pharmaceuticals (TEVA)
Teva is another company with some heavy exposure to opioid lawsuits. Unlike Johnson & Johnson, however, the company’s less diversified holdings have impacted the share price far more thanks to a string of lawsuits. Shares are down 67 percent in the past year.
While the company still faces plenty of litigation over opioid products, Teva is also working on settling cases and combining them for one large action. Doing so will allow the company to continue in business and provide its other life-saving products to customers.
The sharp drop in price has brought shares down to 3 times forward earnings. More interestingly, the company trades for a price-to-sales ratio of 0.5, and a price-to-book value of 0.6 percent. Those numbers suggest that the company’s shares are worth nearly twice as much as what they’re currently trading for if the company simply went out of business, sold its assets in an orderly manner, and distributed the proceeds to shareholders.
Although the company doesn’t pay a dividend, the prospect for high capital gains as the litigation settles down makes for a huge potential winner here. Shares are a buy up to $8.00, and speculators may even want to look at buying call options given the low price of shares.
Pick #3: Gilead Sciences (GILD)
Far from the opioid litigation crowd is Gilead Sciences (GILD), a bio-pharmaceutical company focusing on various products to treat liver disease, auto-immune disease, and others. It’s the market leader in the auto-immune disease space.
The company has had some struggles as some of its major drugs have gone off-patent, but the company has been capable of replacing those with their own generic versions and through some strategic acquisitions, including an investment in Galapagos (GLPG) earlier in the year. Traders expect more deals ahead, as the company just shuffled up its executive lineup with a new CEO.
The biotech company has seen flat revenue growth in the past year, but with a 26 percent profit margin, the company isn’t suffering. And while shares have declined 13 percent, they trade at 9 times forward earnings, and shares yield 3.8 percent here, a nice yield given the upside potential in shares. More importantly for a biotech company that needs to spend massive sums of cash on research, the company has $28 billion in debt, or $2 billion more than its entire load of debt.
This is a company in a great position with a bright long-term future coming off a few weak quarters and being in an out-of-favor sector. Shares of the biotech company are a buy up to $67.50 per share.