Healthcare Favorites

02/01/2016 8:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

There are some compelling buying opportunities in the healthcare space. Of the various industries within the broader healthcare sector, the one that looks the most attractive heading into 2016 is biotech, explains Ian Wyatt in Daily Profit.

After selling off toward the end of 2015 on fears of rising regulatory intervention in drug pricing, biotech stocks like Biogen (BIIB) and Gilead Sciences (GILD) look downright cheap.

Biogen's profitability metrics are excellent. It generated a 34% profit margin and 34% return on shareholder equity over the past 12 months. Analysts expect the company to grow earnings by 11% in 2016, meaning the stock trades for a modest 16 times forward EPS estimates.

Considering that Gilead trades for just 9 times trailing earnings and 8 times forward EPS estimates, this stock is very attractive.

For investors unwilling to wade into the biotech pool, there are safer alternatives within the healthcare sector. Arguably the safest big pharma stock around is Johnson & Johnson (JNJ).

That's because J&J operates an extremely diversified and large business. Approximately 70% of the company's revenue comes from No. 1 or 2 global leadership positions in its respective markets.

The J&J family of companies includes the world's sixth-largest consumer health and biologics companies and the fifth-largest pharmaceutical company. This provides J&J with very steady earnings growth.

In fact, the company has increased its adjusted earnings for the past 31 years in a row.

Johnson & Johnson also has an excellent balance sheet. It's one of only three US companies to hold a triple-A credit rating from Standard & Poor's.

J&J is also an excellent dividend stock. It currently yields 3% and the company raised its dividend last year for the 53rd time in a row. That makes J&J a member of the exclusive S&P 500 Dividend Aristocrats list.

The key takeaway for investors is that 2016 could be a much better year for healthcare stocks than 2015.

Within big pharma, there is a wide range of companies that suit a variety of investor needs, from value, to growth, to dividends, and everything in between.

If their revenue and earnings continue to grow, Biogen, Gilead, and Johnson & Johnson could be outperformers in 2016. Right now could be great opportunity to buy these highly profitable stocks at discounted prices.

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