Aside from the election, the big story as we head into the new year is the COVID-19 vaccine. Margaret Keenan, a woman that lives in England, was the very first person in the world to receive the vaccine outside of a trial last week. This week the vaccine rolled out in the United States.
The coronavirus pandemic has made the pharmaceutical industry as hot as stay-at-home stocks and electric vehicle stocks. Big pharma had traditionally been known for being strong health care stocks that provided steady cash flow and dividends. The search for a COVID vaccine has turned the industry upside down as research went into therapies and vaccines. When you combine the pandemic with an aging population, you have the recipe for strong growth in the years to come. The need for medication and vaccines will only continue during and after the pandemic.
That’s why I have taken a keen interest in finding the top pharmaceutical stocks for investors as we end the year. I could have gone with some of the high-flying biopharma companies, but I believe investors would be better suited to traditional large-caps that will see profits not only from the vaccines but also as a result from a booming economy that will lead to growth in their other business segments. With that said, I believe Pfizer, Inc. (PFE), Merck & Company, Inc. (MRK), and Johnson & Johnson (JNJ) offer the best potential right now.
Pfizer, Inc. (PFE)
PFE has become the most recognizable name when it comes to the COVID vaccine. Along with partner BioNTech (BNTX), the company developed the vaccine based on messenger RNA (mRNA). mRNA works with our own DNA to start fighting a virus before we get it and then recognizes that virus when we’re exposed to it. PFE is also working with BNTX on a vaccine for the flu using the same technology. If the flu vaccine gets anywhere as effective as the COVID vaccine, both companies could instantly become leaders in the $4.45 billion flu vaccine market.
PFE isn’t a one-trick pony, either, not by a long shot. The company has been around since 1849, providing medications for patients. While the vaccine is the company’s most significant near-term catalyst, it also has a strong portfolio with eight blockbuster products. The company expects sales growth from products such as Ibrance, Inlyta, and Eliquis. PFE also has a deep pipeline of new drugs, including a few promising oncology treatments.
While sales are down for the year due to the pandemic, analysts expect sales to pick up next year. Revenue is expected to grow 11.5% next year, while earnings are forecasted to rise 12.8%. PFE also has a strong dividend yield of 4% and a favorable debt profile. More importantly, though, is its valuation. While the stock initially popped after announcing its vaccine results, it has since pulled back and currently sports a forward P/E of only 13.11.
The stock is rated a “Buy” in our POWR Ratings system. It holds a grade of “A” in three out of the four components that make up the POWR Ratings, including Trade Grade, Peer Grade, and Industry Rank. For the fourth component, Buy & Hold Grade, the stock has a “B” grade. PFE is ranked #19 in the Medical – Pharmaceuticals industry.
Merck & Company, Inc. (MRK)
Similar to PFE, MRK is another large pharmaceutical company with origins in the nineteenth century. Founded in 1891, the company has been focused on cancer treatment but has gradually been building up its research for COVID treatments and vaccines. In May, the company acquired Austrian biotech Themis and its and its experimental vaccine.
MRK is also working with nonprofit IAVI on an additional vaccine and licensed an antiviral drug from Ridgeback Therapeutics. More recently, the company announced that it would acquire OncoImmune, a small biotech company with an experimental COVID-19 treatment that has shown a 60% better recovery chance than a placebo.
Prior to the pandemic, the company benefited from its flagship drug, Keytruda, which is used to treat melanoma, lung cancer, head and neck cancer, Hodgkin lymphoma, and stomach cancer. MRK holds onto its exclusivity for the drug until 2028 and has no key brands losing exclusivity until 2022. The company’s growth will also be driven by animal health and vaccine products.
MRK provides a dividend yield of 3.2% and is currently trading below its intrinsic value with a trailing P/E of 17.73 and a forward P/E of 12.44. The stock is rated a “Buy” in our POWR Ratings system. It holds a grade of “A” in Trade Grade, Peer Grade, and Industry Rank, and a “B” for Buy & Hold Grade. The stock is also ranked #21 in the Medical – Pharmaceutical industry.
Johnson & Johnson (JNJ)
The final stock on this list might even be the most recognizable. While not as old as PFE, JNJ is definitely the most diversified healthcare stock on this list. The company operates in pharmaceuticals, medical devices and diagnostics, and consumer products. While its medical device segment took a hit this year with the pandemic, due to the postponement of many elective procedures, pent-up demand should drive growth as the population gets vaccinated.
Similar to PFE and MRK, JNJ is also in the search for a COVID vaccine. While PFE is getting all the headlines as it was the first one to get approved, don’t count out JNJ just yet. Most of the leading vaccine providers and candidates require two doses and strict freezing storage requirements. JNJ, on the other hand, only requires one dose and doesn’t require freezing. If its trial results are anywhere similar to PFE, JNJ may even become the largest selling provider.
In the pharmaceutical segment, which makes up over 50% of sales, its COVID vaccine isn’t the only promising drug. Key drugs will drive future growth, including Darzalex, Imbruvica, and Stelara. In addition, the company has a very strong pipeline with 14 drug launches expected by the end of 2023. Even more enticing is its dividend yield of 2.7%, which has been increased for more than 50 years in a row.
The stock is also priced fairly low, with a forward P/E of 16.92. JNJ is also rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” in every single POWR component, including its overall grade. The stock is also ranked #1 in the Medical – Pharmaceutical industry.
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PFE shares rose $0.04 (+0.10%) in after-hours trading Tuesday. Year-to-date, PFE has gained 8.56%, versus a 16.48% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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