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Favorite Pharmas for Value Investors

02/20/2014 8:00 am EST


John Buckingham

Editor, The Prudent Speculator

Among our favorite investing ideas for the year, we recommend two leading pharmaceutical stocks that are trading at attractive levels for long-term value investors, notes John Buckingham, editor of The Prudent Speculator.

Johnson & Johnson (JNJ), a global healthcare company, develops, manufactures, and markets a diversified portfolio of pharmaceutical, medical device, diagnostic, and consumer health products.

We like that JNJ maintains a diverse revenue stream and a robust research pipeline. Additionally, JNJ, seemingly, faces relatively few major patent losses over the next few years, and the majority of its pharmaceutical offerings are specialty drugs, which frequently carry stronger pricing power.

Furthermore, we see long-term attractive potential for the company's orthopedics business, as positive market demographics continue to build, as well as opportunistic expansion in emerging market regions.

Management recently announced earnings projections for 2014 in the range of $5.75 to $5.85 per share.

JNJ shares are currently offered at less than 15 times consensus forward earnings estimates, while the yield for the higher-quality, lower-volatility name is 3.0%.

Eli Lilly & Co. (LLY) is a global pharmaceutical company focused on discovering, developing, and marketing drugs for neuroscience, endocrinology, oncology, cardiovascular, anti-infective, and other indications.

The firm is further diversified with an animal health business segment. Lilly recently reported Q4 earnings ($0.74 per share) and revenue ($5.8 billion) that beat analyst expectations.

While LLY will have to continue to endure some patent losses within its human drug business, including the drug Evista in March of this year, we see those situations being potentially mitigated by the firm's attractive potential in its product pipeline, as well as its strong growth prospects within the animal health business.

The stock price having gone nowhere over the last year, we think that Lilly shares offer an attractive valuation along with a generous 3.6% dividend yield.

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