While the run since the Trump election and now the inauguration has been solid, there are some storm clouds on the horizon. Volatility has drifted to historic lows, while price-to-earnings on a current and forward basis are at highs not seen in years. With yields still low, bonds are really not a place to put money, so what do equity investors do now? One Wall Street firm we cover thinks that cheap stocks may be a smart move now.
A new Jefferies research report makes the case that while market parameters are indeed expensive, there still are cheap stocks to buy that have a large enough market cap to provide some safety. They analysts noted in their report:
Though cheap stocks outperformed in the second half of 2016 and have outperformed thus far in 2017, valuation spreads between cheap and expensive stocks are still wide, meaning that cheap stocks remain relatively cheap. That’s particularly interesting given that value stocks tend to outperform in periods of rising Fed Funds rates and rising inflation.
Jefferies has spotted 40 stocks that offer a compelling investment thesis and inexpensive valuations. The following three in pharmaceuticals and biotech look particularly attractive. All are rated Buy and all pay dividends. Plus, we have added a fourth, bonus stock that the Jefferies analysts are bullish on as well.
This is one of the top global pharmaceutical stocks picks across Wall Street. AbbVie Inc. (NYSE: ABBV) is a global, research-based biopharmaceutical company formed in 2013 following separation from Abbott Laboratories. The company’s mission is to use its expertise, dedicated people and unique approach to innovation to develop and market advanced therapies that address some of the world’s most complex and serious diseases. AbbVie employs more than 26,000 people worldwide and markets medicines in more than 170 countries.
One of the biggest concerns with AbbVie is what eventually might happen with anti-inflammatory therapy Humira, which generated $14 billion in sales in fiscal 2015. That was the most any drug has recorded during a single year and represents a gigantic part of the company’s overall earnings. The problem is that biosimilars and generics are itching to enter the market with Amgen leading the charge, and some Wall Street analysts project that AbbVie may have a difficult time stopping that trend.
Last May, the patent board instituted Coherus BioSciences’ Inter Partes Review against the Humira ‘135 patent. The outcome of the review is expected next year. While most analysts remain positive on Humira duration, the expected litigation uncertainty could continue to create an overhang on the stock, which does give investors chances to pick up shares lower.
AbbVie investors receive a 4.2% dividend. The Jefferies price target for the stock is $90, and the Wall Street consensus target is $69.75. Shares closed Friday at $61.15.
This biotech giant posted outstanding third-quarter earnings, and it remains a top stock for investors to buy. Amgen Inc. (NASDAQ: AMGN) focuses on areas of high unmet medical need and leverages its biologics manufacturing expertise to strive for solutions that improve health outcomes and dramatically improve people’s lives. A biotechnology pioneer since 1980, Amgen has grown to be one of the world’s leading independent biotechnology companies, reaching millions of patients around the world and developing a pipeline of medicines with breakaway potential.
The company posted revenues above expectations and showed strong expense management. It also raised guidance for revenues and earnings, and many on Wall Street think the numbers could be conservative. Amgen also reaffirmed interest in mergers and acquisitions activity as a way to sustain long-term growth. Jefferies cites the cheap 13.4 times estimated earnings-per-share multiple for 2017 as a key reason to own the shares.
Amgen’s double-digit earnings and revenue growth rate is expected to continue for the foreseeable future because of the company’s very deep clinical pipeline, which includes potential blockbusters Repatha for high cholesterol and Kyprolis for relapsed multiple myeloma. Amgen also has one of the industry’s deepest biosimilar pipelines, which is expected to generate upward of $3 billion in annual sales in the years ahead.
Amgen shareholders receive a 2.73% dividend. Jefferies has a $198 price target. The consensus target is $181.73. Shares closed Friday at $154.67.