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The overall stock market was down only slightly in 2015, but the health care sector saw a great deal of volatility. Biotech stocks in particular had a whipsaw year, reminding investors once again that these stocks can be highly volatile.
But the good news is that there may be some compelling buying opportunities in the health care space.
Biotech in Focus
Of the various industries within the broader health care sector, the one that looks the most attractive heading into 2016 is biotech. After selling off toward the end of 2015 on fears of rising regulatory intervention in drug pricing, biotech stocks like Biogen (NASDAQ: BIIB) and Gilead Sciences (NASDAQ: GILD) look downright cheap.
Biogen reached a peak at $475 per share in March 2015. Now that it’s under $300 per share, and the stock trades for just 19 times trailing earnings. This is actually a below-market multiple, despite the fact that Biogen grew revenue and earnings by 12% and 33%, respectively, in the first three quarters of 2015. For the full year, the company expects 8% to 9% revenue growth. Its valuation looks far too low for a company that is likely to grow earnings well above the S&P 500 index as a whole in 2016.
Biogen’s profitability metrics are excellent. It generated a 34% profit margin and 34% return on shareholder equity over the past 12 months. Analysts expect the company to grow earnings by 11% in 2016, meaning the stock trades for a modest 16 times forward EPS estimates.
Considering that Gilead trades for just 9 times trailing earnings and 8 times forward EPS estimates, this stock is very attractive. Its valuation could rise going forward because it has a compelling catalyst in the form of its hepatitis C medication, for which the company recently filed a new drug application (NDA) with the Food and Drug Administration. This could add to Gilead’s existing pipeline, which is strong.
Gilead grew revenue and diluted earnings per share by 37% and 68%, respectively, through the first three quarters of 2015. And the icing on the cake is that the stock even offers investors a 1% dividend yield, making Gilead an intriguing pick for both growth and income.
A Safe Pick for Steady Returns
For investors unwilling to wade into the biotech pool, there are safer alternatives within the health care sector. Arguably the safest Big Pharma stock around is Johnson & Johnson (NYSE: JNJ). That’s because J&J operates an extremely diversified and large business. Approximately 70% of the company’s revenue comes from No. 1 or No. 2 global leadership positions in its respective markets.
The J&J family of companies includes the world’s sixth-largest consumer health and biologics companies and the fifth-largest pharmaceutical company. This provides J&J with very steady earnings growth. In fact, the company has increased its adjusted earnings for the past 31 years in a row.
Johnson & Johnson also has an excellent balance sheet. It’s one of only three U.S. companies to hold a triple-A credit rating from Standard & Poor’s.
J&J is also an excellent dividend stock. It currently yields 3%, and the company raised its dividend last year for the 53rd time in a row. That makes J&J a member of the exclusive S&P 500 Dividend Aristocrats list.
Bottom Line for Big Pharma Stocks
The key takeaway for investors is that 2016 could be a much better year for health care stocks than 2015. Within Big Pharma, there is a wide range of companies that suit a variety of investor needs, from value, to growth, to dividends and everything in between.
If their revenue and earnings continue to grow, Biogen, Gilead and Johnson & Johnson could be outperformers in 2016. Right now could be great opportunity to buy these highly profitable stocks at discounted prices.
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