It's been a good year for healthcare stocks in general, but a handful of quality companies haven't been swept upward with the rest of the sector. Allergan plc (NYSE: AGN) and CVS Health Corp. (NYSE: CVS) are both poised to continue churning out profits and dividends for years to come, but they aren't priced that way. Both have been trading at a much lower multiple of their earnings power and could provide market-beating gains over the long run.
For investors looking for more excitement, Celldex Therapeutics (NASDAQ: CLDX) just passed an important milestone that sets the biotech stock up for a big movement early next year. This tiny company hasn't entered the commercial stage yet, but that could change quickly if its lead candidate can repeat a previous success.
Continue Reading Below
A different anti-aging strategy
Allergan plc has used massive cash flows generated by Botox to acquire a stable of branded drugs that could keep its bottom line marching steadily higher. In 2017 alone, the company earned approvals for five drugs, and applications for five more in late-stage clinical trials at the moment could make their way to the Food and Drug Administration in the quarters ahead. For example, ubrogepant and atogepant could fill a huge unmet need for millions of Americans who suffer from frequent migraine headaches.
Botox sales still comprise about 20% of total revenue for the company, and I expect its continued success will keep investors from frowning longer than the treatments themselves. Manufacturing a biologic drug like Botox is a complex process, which should keep the threat of generic competition at bay for years to come. The Botox brand dominates the cosmetic market where it faces some competition, but FDA approvals for therapeutic categories should allow the neurotoxin to generate profits in competition-light niches for many years to come.
With a Botox franchise that looks like it can weather patent expirations with a smile, and new drugs coming through the pipeline, the average analyst expects Allergan's annual earnings growth to average 13.25% over the next five years. Despite a clear path to double-digit bottom line growth, the stock is trading at just 12.3 times this year's earnings estimates. To put that in perspective, the average stock in the S&P 500 has been trading at 18.7 times forward estimates.
To top it off, this top healthcare stock began making quarterly dividend payments this year. The 1.3% yield the stock offers at recent prices isn't the biggest payout you'll find in big pharma, but Allergan shouldn't have much trouble boosting it higher. The first two payments required just 5% of profits recorded during the first half of the year.
It's the businesses you don't see
Investors looking for a healthier dividend yield at the moment should consider CVS Health Corp. for the business segment most aren't familiar with. You might not know this, but the 9,700 retail pharmacy outlets this company runs generate less revenue than its pharmacy benefits management (PBM) business.
Although the company's retail pharmacy business has been slipping lately, second quarter sales from the pharmacy services segment rose 9.5% over the same period last year. The PBM added $1.8 billion in new business for the 2018 selling season and boasts a 97% customer retention rate.
The recent integration of Omnicare's operations made CVS the leading provider of pharmaceutical services to U.S. nursing homes and related facilities. The expansion gives CVS Health's PBM more purchasing power that it can use to negotiate lower prices from branded and generic drug manufacturers.
Immense purchasing power should keep the PBM growing even if retail sales continue to decline, which is why the stock's recent price of about 13.2 times this year's earnings estimate seems too low to stay put much longer. The dividend offers a 2.6% yield, and a low 37% payout ratio suggests plenty of payout bumps in the years ahead.
Celldex Therapeutics is a tiny, clinical-stage biotech with a candidate in a pivotal study that just completed enrollment. Glembatumumab vedotin, or glemba, looks for a protein called gpNMB on the surface of tumor cells where it delivers a lethal dose of chemo.
Glemba's target is associated with an extremely difficult to treat form of breast cancer that lacks three targets available therapies look for. It took a long time to find 327 advanced stage, triple-negative breast cancer patients with tumors that overexpress gpNMB, but Celldex got it done.
The company will measure how long patients survive without showing signs of disease progression. During a previous study, progression-free survival for a subgroup of triple-negative breast cancer patients with lots of gpNMB on their tumor cells was more than twice as long as the group treated with standard chemotherapy.
If glemba can repeat its previous success in the ongoing study, this stock will soar. Of course, a surprise failure could lead to swift losses. Now that the pivotal trial is fully enrolled, we should know one way or the other in the first half of next year.
10 stocks we like better than AllerganWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Allergan wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 1, 2017