Merrill Lynch Top Health Care Stock Picks for September: Focus on Large Cap Biotech

September 13, 2017 by Jon C. Ogg

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Merrill Lynch recently released its September RIC Report, noting key strategy views and showing many sector views. One such view from the firm was that health care stocks are currently close to all-time low valuations, and the firm believes that fund managers have reduced their holdings while the sector continues to surprise to the upside on earnings and sales.

According to Merrill Lynch, the health care sector should act as a good hedge against volatility. It is also considered to be the primary beneficiary of aging demographics, while paying yields at reasonable prices. Even biotech was shown to offer growth at a reasonable price.

Before investors just jump in blindly, they should note that the RIC Report does highlight at least some health care risks. One risk is that leverage has significantly increased from mergers and acquisitions, but that remains low relative to other sectors. Another concern was that wage pressures could hurt labor-intensive health care providers and services stocks. Yet another risk to consider is that health care has the highest government spending exposure of any sector and the future of the ACA (Obamacare) is still unknown. A last risk cited was that health care stocks would lag in a cyclical economic upturn.

Merrill Lynch’s Savita Subramanian noted that health care stocks are currently trading at a 6% discount to the market. While this does not sound much of a discount, she pointed out that the health care sector traditionally has traded at a 15% premium to the market and that it is now an out-of-favor sector. Fund managers also appear to have the lowest level of ownership in health care since 2008, and they are grossly underweight the sector, if compared to the peak ownership of 2014.

One serious help to health care is coming from demographics, with the U.S. Census projecting that the percentage of the U.S. population older than 65 will double over the next 20 years. Health care also was shown to account for about 13% of all spending in that age group, almost double that percentage for those under age 65. The top subsector within health care is large cap biotechs, at a discount to the market and valued the lowest versus the market in the past three decades.

24/7 Wall St. went through some of the sector calls within health care in the September RIC Report and elsewhere in the Merrill Lynch coverage universe in health care. While not every single stock mentioned comes with a Buy rating, the reality is that almost all the companies mentioned either came with solid dividends or they still had implied upside to the firm’s official price objective.

Of the large-cap biotech picks, Regeneron Pharmaceuticals, Inc. (NASDAQ: REGN) was trading at $506.79 when Merrill Lynch added it to the US 1 List (its focus list) and the shares were at $471.49 ahead of its RIC report. This stock was last seen down at $444.48, with a $47 billion market cap. Merrill Lynch’s price objective is all the way up at $588, compared with about $499 as the consensus analyst target from Thomson Reuters.

With a focus singling out big-cap biotech names, we dug through the largest biotechs other than Regeneron. These were not part of Merrill Lynch’s RIC Report but they do have Buy ratings and upside price objectives.

Amgen Inc. (NASDAQ: AMGN) is covered with a Buy rating, and the firm has a $192 price objective. Unfortunately, its shares are close to $191 at this time, and the market cap is about $139 billion. Amgen pays a 2.4% yield to investors.

Biogen Inc. (NASDAQ: BIIB) is covered with a Buy rating, and Merrill Lynch has a $358 price objective. Trading at $329.69, Biogen has a market cap near $69 billion.

Celgene Corp. (NASDAQ: CELG) is rated as Buy at Merrill Lynch, and the $142.07 current price is still under the $154 price objective. Celgene’s consensus target price is $150.78, and its market cap is just above $111 billion.

Listed in the Merrill Lynch U.S. High Quality & Dividend Yield Screen is Johnson & Johnson (NYSE: JNJ),¬†and it has been on that list since 2013. The company’s stock price keeps going up (currently $132.63) and it keeps raising its dividends and delivering on earnings. Its yield is 2.54% now but is far higher for those who have held for years. The firm has a Neutral rating on the stock, but its price objective of $141 is more than $4 above the consensus analyst target.

Thermo Fisher Scientific Inc. (NYSE: TMO) was added to the US 1 List on May 9, 2017. It traded at a $172.12 price at that time, and its shares were at $191.63 ahead of the RIC report cut-off date. With the share price at about $194 now, the Merrill Lynch rating is Buy and the price objective is up at $220. The firm even noted that Amazon faces hurdles in lab supply market while Thermo Fisher is well-positioned.

Three more picks were in the Small Cap US Buy List, its Endeavor list. These were listed below.

Catalent Inc. (NYSE: CTLT) was trading at $40.35 ahead of the RIC Report, and it is valued at about $5.1 billion. Merrill Lynch has a Buy rating, and the firm raised its price objective on the shares to $40 at the end of August.

Charles River Labs International Inc. (NYSE: CRL) was at $108.18 ahead of the RIC Report. Its market cap is about $5.2 billion. Merrill Lynch has a Buy rating and a $117 price objective on the stock.

Hill-Rom Holdings Inc. (NYSE: HRC) was at $77.72 ahead of the report, with a $5.1 billion market cap. Hill-Rom is rated as Buy at Merrill Lynch with an $88 price objective.

Merrill Lynch also had some international picks for health care dividends. Each of these came with American depositary shares (ADSs) as seen below, and the price objectives have been converted to dollars as of the firm’s latest research reports on each company.

AstraZeneca PLC (NYSE: AZN) is listed among its top International Low Volatility & Dividend Yield Screen. The U.K.-based pharmaceutical giant has an $81 billion market value and an implied 4.6% yield. Merrill Lynch has a Buy rating, and its price objective was last seen at about $38.46 when converted to dollars. AstraZeneca shares were trading at $33.42 on last look.

Novartis A.G. (NYSE: NVS) was listed as having a $195 billion market value, with a 3.2% dividend yield. Merrill Lynch only has a Neutral rating on Novartis, but its ADS price of $85.72 compares with the firm’s implied price objective of $89.

Sanofi (NYSE: SNY) has a $116 billion value and a 3.3% gross implied yield. With its shares at $48.83 now, Merrill Lynch has a Buy rating and its last official dollar-converted price objective was roughly $57 for the ADSs.