- While the S&P 500 has lost more than 13% year to date, pharma stocks are up 6%.
- BMY, MRK and ABBV have all beaten the pharma index so far this year.
- All three pharmaceutical stocks are relatively cheap and sport sizable dividends.
All the top most-favored growth stocks of the last two years have been humbled in 2022. Since the pandemic began, retail investors piled into names like Upstart, Affirm, Sea Limited, Shopify and Snowflake. Although every single ticker is unique and unlike any other, investors who front-loaded growth have seen the value of their portfolios drop by as much as 80% in the first half of 2022's horrific market sell-off. The blame can be laid at expanding inflation, the covid supply crunch or the Fed's hefty interest rate hikes (or, more likely, all three), but nonetheless the fallout seems likely to continue. In the current scenario many investors are looking to preserve capital rather than make risky long-term bets that growth stocks return and similar multiples as before.
At this point, nearly everyone knows that energy has been the best performing sector in the first half of this year, and oil stocks have made some of the best trades due to Russia's invasion of Ukraine and the ensuing oil price spike. Many observers appear to have missed out on the pharmaceutical industry though. The Nasdaq US Benchmark Pharmaceuticals Index has gained nearly 6% year to date, while the S&P 500 has lost more than 13%.
S&P 500 vs. Nasdaq Pharmaceutical index YTD
What is more, is that quite a few of the largest and safest pharmaceutical stocks have outperformed their index by a hefty margin. Below you can see how three of the best and biggest players in the industry have performed so far this year. While the benchmark index sits just below a 6% gain for the year, AbbView (ABBV) has garnered a 10.8% increase in valuation, Merck (MRK) has advanced 21.1%, and Bristol-Myers Squibb (BMY) has added 23% to its market cap. As a method of capital preservation, these three pharma stocks seem your best bet for waiting out the current market capitulation.
Daily Chart of Pharmaceuticals index vs. MRK, BMY, ABBV
While oil stocks have already made their advance, share prices in that industry are fickle. A severe drop in the price of oil is likely if the war in Ukraine comes to a halt this summer or fall. Pharma stocks on the other hand are only looking up. They are cheap, provide sizable dividends and act as safe havens during market downturns.
AbbVie (ABBV) has only been around since 2013 when parent Abbott Laboratories (ABT) decided to spin off its main pharmaceutical business. At that time some turned up their noses at the new stock, seeing as its drug Humira was about to lose its patent protection. For the next decade though, AbbVie went on an acquisition spree that has padded its top line and made it one of the largest drug manufacturers in the world.
Even with a market cap of $265 billion though, AbbVie looks cheap on a number of metrics. Over the past half decade, despite growing revenue by 17.6% on average and operating cash flow by 25%, ABBV stock trades for just a 10.4 forward EV/EBITDA multiple. The sector at large averages 13.3 on this scale. Its forward price/sales ratio at 4.5 is also below its sector.
It sports a 3.76% dividend, nearly thrice what the S&P 500 offers. On top of that, management has been growing the dividend at a 13.2% annualized growth rate over the past five years. With a rather high 78% payout ratio, it may seem like ABBV cannot possibly keep its dividend growing at this rate. However, AbbVie has managed to grow EBITDA (earnings before interest, taxes, depreciation and amortization) at a greater than 22% rate over the past five years, so substantial payout growth makes for a solid bet.
ABBV stock has been in a downtrend since April 7. May has seen some consolidation and the closing of the gap formed on April 29. The 9-day and 20-day moving averages have overlapped during the past week and a half. If ABBV shares close below $147, then support seems strong at $140, which is where we recommend picking up shares. Closing above $157 will signal renewed interest, but resistance at $159.50 should be quite strong.
ABBV daily chart
Bristol Myers Squibb (BMY) is the result of more than 130 years of acquisitions. Today the pharma giant has laboratories and operations in more than a dozen locations in the US, as well as the UK, Spain, Belgium and Japan. In 2019 BMY completed its largest acquisition yet with the $74 billion takeover of Celgene. It is known for its diabetes drugs and especially its cancer treatment Opdivo.
Its EV/EBITDA multiple is 9, and its forward price/sales is 3.5, which is even cheaper than AbbVie. These low multiples are usually reserved for stale companies with bleak prospects, but Bristol Myers has grown revenue by more than 21% on average over the past five years and operating cash flow by more than 59% annualized in that span. On the dividend front, the 2.84% yield is more than twice the S&P 500 overage. The company has grown its dividend by 7% on average over the last half decade.
Forecasting the next six months is hard with this one, since it has already advanced more than 20% year to date. The daily chart below shows what some might at first glance think looks like a triple top. In fact though, BMY shares have butted up against the $78.12 resistance level seven times since entering this bullish rectangle on April 7.
Bullish rectangles are bullish continuation patterns where triple bottom and triple tops have failed on their confirmations. A close look at the chart shows that the last three candles to touch $78.12 have made attempts beyond above it. At the same time the last three low candles have not even reached the support at $74.86. This is another sign that BMY stock will soon break through its top line and travel until it finds more suitable resistance. The length of this bullish rectangle will determine how large the next run-up is, but we see at least $85 as the next level to overtake.
BMY daily chart
Merck & Co. (MRK) is yet another diversified drugmaker with major products aimed at diabetes, cancer, autoimmune disorders and most recently an antiretroviral pill for treating Covid-19. Like its counterparts in this article, Merck has prospered by a heavy focus on research and via an active acquisition strategy. Over the past decade, Merck bought out Idenix Pharmaceuticals, OncoEthix, Cubist Pharmaceuticals, Afferent Pharmaceuticals, Calporta, Tilos Therapeutics, Rigontec and Peloton Therapeutics, just to name a few.
Merck has grown slower than its competitors over the past five years but has remained robustly profitable. Revenues have grown on average about 7% per year, and operating cash flows have neared 10% growth annually. MRK’s EV/EBITDA comes in at just under 11, and it trades for a cheap four times forward sales. The dividend is what makes this one valuable. At 3%, the yield has grown at nearly a 10% clip annually over the past five years.
MRK stock just hit a new all-time high on May 23, so $94.80 remains the target for bulls to beat. There is no reason to think that will remain the high of the year. The company and industry is cheap and has benefitted from the weakness in other sectors. MRK stock looks to have found support at $91. If it breaks below this level, then it will likely stop quickly at $88.77, a former resistance line. The 9-day moving average is solidly above the 20-day moving average, showing that MRK stock is trending in a healthy upward trajectory. Look to buy when the price meets the 20-day moving average around $91.
MRK daily chart