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"Sleep Well" Value Bets in Pharma: Amgen & J&J

06/12/2018 5:00 am EST

Focus: HEALTHCARE

John Buckingham

Editor, The Prudent Speculator

We continue to think that the only problem with market timing is getting the timing right, so we believe that the right positioning for long-term investors is to simply ride through the fluctuations, explains value expert John Buckingham, money manager and editor of The Prudent Speculator.

We are secure in the belief that our broadly diversified portfolios of undervalued stocks will prove rewarding in the fullness of time. Certainly, that does not mean that there won’t be more scary headlines to come, so we are always braced for downside volatility.

However, we sleep well at night these days as investor sentiment is far from optimistic, interest rates are still very low by historical norms, the global economies are showing modest to moderate growth, corporate profits are poised to enjoy significant growth this year and next and equity valuations are far more reasonable after this year’s churning.

Amgen (AMGN), one of the world’s largest biotech companies with annual revenue near $23 billion, is engaged in the discovery, development and delivery of human therapeutics. The firm has a global presence and its medicines treat cancer, kidney disease, rheumatoid arthritis, bone disease and other serious illnesses.

The company recently reported excellent Q1 adjusted EPS ($3.47 vs. $3.21) and completed its modified Dutch auction tender, in which more than 52 million shares were bought back. The $10 billion transaction represented 7.2% of outstanding shares.

We are pleased with the size of the repurchase, a move that will result in an immediate boost to EPS (though not overall earnings). Although the chatter surrounding drug pricing is persistent, we like the pipeline of new products and are pleased with the operational progress AMGN has been making, so we believe the long-term potential for the stock remains very attractive.

We are also partial to Amgen’s strong free cash flow generation, solid financial footing and willingness to return capital to shareholders. We also fancy the generous 2.9% dividend yield.

Johnson & Johnson (JNJ) is a leading global health care company, with a diversified portfolio of pharmaceutical, medical device, diagnostic and consumer health products.

Despite being one of the highest quality names in the healthcare space, shares are down 13% this year on concerns over competition, pricing pressures and ongoing issues in the company’s medical technology division.

That said, we like that JNJ maintains a broad revenue stream, which helps insulate the firm from economic downturns and offers investors a defensive growth opportunity that pays a stable dividend. We are also constructive on management’s announced focus of resources towards critical capabilities, technologies and supply chain improvements.

Despite the headwinds, we continue to like the product mix and that the majority of its pharmaceutical offerings are specialty drugs, which frequently carry stronger pricing power. We are also comforted by the firm’s recent acquisitions, which add further diversification.

We continue to view the company as uniquely situated with unmatched depth and breadth in growing global health care markets, and we think that there is solid potential for a number of its compounds in clinical trials.

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