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Prudent Picks in Healthcare

12/30/2015 8:00 am EST


John Buckingham

Editor, The Prudent Speculator

We focus on broadly diversified investments in undervalued stocks for their long-term appreciation potential, explains value investor John Buckingham, editor of The Prudent Speculator.

We discriminate among potential investments primarily by their relative valuation metrics and our assessments of stock-specific risk.

We buy only those stocks we find undervalued along several lines relative to their own trading history, those of their peers or that of the market in general.

The prices at which we’ll buy and sell stocks incorporate a range of fundamental risks (e.g. credit, customer, and competitive dynamics) that we believe the companies may face over our normal three-to-five-year investing time horizon. Here's a look at two recent recommendations, both in the pharmaceutical sector.

Gilead (GILD)

Gilead Sciences is a research-based biopharma focusing on areas of unmet medical need. Gilead’s portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer, inflammatory and respiratory diseases, and cardiovascular conditions.

GILD turned in another strong quarter, reporting better-than-expected quarter 3 revenue of $8.3 billion and EPS of $3.22, versus respective forecasts of $7.9 billion and $2.88.

Additionally, its two Hepatitis C drugs, Sovaldi and Harvoni, generated $4.8 billion in sales during the third quarter, topping estimates. For the year, Gilead again raised its outlook for net product sales, this time to a range of $30 billion to $31 billion.

Although there continues to be public debate over pricing, many believe GILD’s Hep C drugs will remain the preferred choice of doctors due to better clinical data and significantly friendlier administration. Additionally, we like Gilead’s leading position in treating the HIV virus.

Along with management’s work to further expand its pipeline and diversify the company, we are constructive on the massive $15 billion share repurchase program and attractive valuation. Unlike many biotechs, GILD trades for less than 9 times estimated earnings and yields 1.6%.

Sanofi (SNY)

Sanofi is a global integrated healthcare company with a robust and promising pipeline of new pharmaceuticals, including several that address diseases that have no current treatments.

We are optimistic about Praluent, which could potentially revolutionize the bad-cholesterol-lowering statin market. Sanofi also has a leading diabetes line of medicines, including blockbuster Lantus.

While competition is tough, we like the opportunity in the diabetes space because the worldwide population of diagnosed diabetics is likely to show growth as global obesity rates continue to climb. We also like the firm’s footprint within emerging economies.

Sanofi is said to be considering a divesture of its animal health business, which could provide capital for further pipeline investments as well as share buybacks and dividends. SNY yields 3.0% today.

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