With the benefit of perfect hindsight, the middle of 2015 represented a high tide in healthcare investing.
While the sector overall has recovered this year - the Health Care SPDR (ETF) (NYSEARCA: XLV ) is up 15% year to date - many of the leading industry players are trading at significant discounts to the levels their share prices traded at two years ago. Today, valuations are looking reasonable and management teams are nursing a number of laggards back to health.
Here are seven interesting plays in the industry.
Healthcare Stocks to Buy Now: Biogen (BIIB)
Biotechnology giant Biogen Inc's (NASDAQ: BIIB ) stock is down 33% in the past two years. BIIB stock has traded at an average price-to-earnings ratio of 28 over the past five years. Right now, its P/E ratio (based off earnings expectations of $20 per share) sits at 12.3, or less than half its five-year average.
Biotech stocks in general remain out of favor, which isn't helping. And while Biogen dominates the market for drugs that help treat multiple sclerosis, many top sellers are either mature or at risk to biosimilar (a generic drug in the biotech space) competition.
A big wild card that could catapult the stock forward would be positive progress for a treatment to Alzheimers that Biogen is currently working on. Marketability could still be many years away, but in the meantime the company should be easily capable of growing sales in the high single digits and earnings in the low single digits.
Healthcare Stocks to Buy Now: Bristol Myers (BMY)
Bristol-Myers Squibb Co (NYSE: BMY ) is another former highflyer that has come back to earth recently. The stock traded above $77 per share within the past year, but is trading much lower recently. It currently sits around $56.
The forward P/E is still somewhat rich at 18, but, as with Biogen, that's less than half its five-year average of 40.2. Its cancer drug Opdivo has had some disappointing results lately, but still holds great potential. Overall, patent losses on current drugs should be more than offset by Opdivo and a growing stable of cancer-fighting drugs and treatments.
Based off total sales, Bristol is also one of the smaller pharmaceutical players. If industry M&A activity improves, the firm could end up being bought out for what would likely be a sizeable premium to its current valuation.
7 Healthcare Stocks to Buy Now Valeant (VRX)
Valeant Pharmaceuticals Intl Inc (NYSE: VRX ) has to be one of the most despised healthcare stocks trading in the marketplace today. Just less than two years ago, the stock price exceeded $260 per share. Today it sits at $13.47, which is after a considerable rally after a swoon down close to $8 per share.
Assuming Valeant doesn't go bankrupt (debt is high, but there appears to be enough cash flow to keep going), the stock really has some significant upside potential. Free cash flow in 2016 was $5.17 per share. Divisions are being sold off to pare the debt load, but it is fair to assume substantial cash flow generating capabilities will remain.
Bill Ackman recently left the board of directors, but John Paulson recently joined to suggest there is some upside to being on Valeant's side. Most investors no longer are.
Healthcare Stocks to Buy Now: Allergan (AGN)
Allergan Plc Ordinary Shares (NYSE: AGN ) is yet another erstwhile highflyer in the industry. The stock has recovered from recent lows, but still stands almost 20% down over the past two years. Management has slowed its acquisitive ways and though resulting debt is high, so is cash on the balance sheet, and interest expenses appear manageable.
Allergan's forward P/E ratio is quite reasonable at 14. Its botox drug appears unstoppable (market share is about 75%) and generates a couple of billion in steady annual revenue. It also is paid for out-of-pocket by patients, thus avoiding complicated health insurance and reimbursement systems.
Like Bristol, Allergan is a small relative healthcare player. At some point, it could get bought out - Pfizer already tried to do so but couldn't get the deal approved back in April 2016. It was rebuffed over speculation it was doing an inversion to incorporate overseas and a sole focus on reducing its domestic tax bill.
Healthcare Stocks to Buy Now: Endo International (ENDP)
Generic drug manufacturer Endo International plc's (NASDAQ: ENDP ) share price isn't quite as damaged as Valeant's, but it is close. Endo traded above $90 per share back in in April 2015 and currently stands at … $11. Once again, its bread-and-butter growth strategy was steady acquisitions, which has left $8.2 billion in debt on the balance sheet.
Net income has been consistently negative since 2012, but cash flow trends are much better. Last year, Endo reported a positive free cash flow. And this year and next, analysts expect in excess of $3 per share in earnings. That suggests a P/E of less than 4, which makes me suspect of the earnings potential. But again, the cash flow production is there.
Endo's market capitalization is only $2.5 billion. Adding in debt puts the enterprise valuation at nearly $11 billion, which is still manageable for a larger pharmaceutical player.
Healthcare Stocks to Buy Now: Teva (TEVA)
Staying in the generic drug space, Teva Pharmaceutical Industries Ltd ( ADR ) (NYSE: TEVA ) shareholders have seen better days. The stock topped out around $70 per share back in July 2015 but has fallen 55% to a recent $31.33.
You guessed it - acquisitions and subsequent debt have investors worried. The generic space is also lower margin, and Teva's existing branded drugs are being increasingly subjected to generic competition.
One benefit with investing in Teva is it pays a decent dividend. The current yield is 4.4%, or more than double the current market average of just over 2%. Buy and hold could pay off for current or prospective investors.
Healthcare Stocks to Buy Now: Pfizer (PFE)
Pharma giant Pfizer Inc. (NYSE: PFE ) represents a safe, yet potentially rewarding, healthcare investment. Its current yield is 3.8% and the forward P/E is very reasonable at 12.4.
Pfizer reported $52.8 billion in sales last year. That's a large base to have to grow from each year. Management has an acquisitive history, but has slowed down its M&A activities and resorted to cost cutting as of late. That should help it leverage mid-single-digit sales growth into high-single-digit profit growth over the next few years.
In the end, Bristol and Pfizer represent your safer above bets, though Biogen looks really interesting given its low valuation. The same goes for Allergan. Valeant and Endo are definitely high risk/high potential reward plays. Teva is the turnaround play of the bunch, though so is Valeant.
As of this writing, Ryan Fuhrmann owned shares of Biogen and Valeant.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.