There Is Value to Be Found in Drug Stocks
Healthcare offers some rare bargains in the current market.
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Friday was monthly options expiration day. This boosted the cash balance in my portfolio as several covered call holdings expired in the money. It also left me with additional dry powder to put to work.
Unfortunately, the current market is more picked over than some of the garage sales my mother loved to go to when I was kid. Some of this cash will head into short-term Treasuries, which yield nearly 5.4% and are an investment "no brainer" within an uncertain market.
The S&P 500 is at all-time highs and trades north of 21 times forward earnings estimates. This as the economy and jobs market look like they are decelerating, and interest rates continue to look like they will be higher for longer as the battle on the inflation front has stalled in recent months. Names like Apple AAPL appear even more overbought.
In the healthcare space, big pharma names such as Pfizer PFE and Gilead Sciences GILD seem to be offering acceptable values with reasonable P/Es and big dividend yields. I have decent-sized covered call positions in both names.
Most growth names in the healthcare space seem overpriced. Take Intuitive Surgical ISRG, the pioneer in robotic surgery. While the company is delivering consistent revenue and earnings growth in the low to mid-teens, the stock is priced at north of 65 times forward EPS.
Intuitive's da Vinci surgical systems are something to behold. However, unless Intuitive is planning on providing an AI-generated replica of the Italian visionary, artist and inventor with each new platform that performs complex surgeries, the shares look utterly overpriced.
I will be adding to my position in Amicus Therapeutics FOLD this week. The shares of this small-cap rare disease concern offer some rare value in this market. The company is delivering 25% to 30% annual sales growth and should turn profitable in 2025. We believe FOLD stock is undervalued given the peak sales potential of the company’s two products on the market .
I will most likely also add to my position in Halozyme Therapeutics HALO. The company's business focus is around enhancing the delivery of other approved injected drugs via an advantageous subcutaneous formulation that improves infusion times and provides a royalty stream and milestone payouts to Halozyme. It is a solid business model, the company is quite profitable and should continue to deliver mid-teens sales growth in the years ahead.
Halozyme has a solid balance sheet, is generating significant free cash flow and has a large stock buyback authorization. The shares seem mispriced to us at 12 times forward earnings. And unfortunately, an investor cannot say the same around many equities in the current market.
At the time of publication, Jensen was long FOLD, GILD, HALO and PFE.
