Two Long-Term Values in Drug Stocks

04/10/2020 5:00 am EST

Focus: HEALTHCARE

John Buckingham

Principal, Portfolio Manager, and Editor, The Prudent Speculator

We buy only those stocks we find to be undervalued along several lines relative to their own trading history, those of their peers or that of the market in general, notes John Buckingham, a leading value investing expert, money manager and editor of The Prudent Speculator.

Our parget prices incorporate a range of fundamental risks (e.g. credit, customer, and competitive dynamic) that we believe the companies may face over our normal three-to-five-year investing time horizon.

Abbott Laboratories (ABT) develops, manufactures, and sells health care products and services with a portfolio of leading, science-based offerings in diagnostics, medical devices, nutritionals and branded generic pharmaceuticals.

Shares have held up relatively well during the market selloff, and recently rallied after the company announced that the FDA had granted an emergency use authorization for its COVID-19 portable molecular test, which is capable of detecting the virus within 5 minutes.

The test will run on the company’s ID NOW platform, providing rapid results in a wide range of healthcare settings such as physicians’ offices, urgent care clinics and hospital emergency departments (there are 18,000 ID NOW units currently placed).

The COVID-19 tests will definitely give a boost to the firm’s diagnostic business, but we would expect the overall segment to still be down as fewer other tests will be run during this time.

The near term is anyone’s guess, but in the long run, we believe that high-quality Abbott should be able to continue to enhance its free cash flow generation, especially as its continuous glucose monitoring system, the FreeStyle Libre, increases in popularity. Our target price is $94.99.

One of the highest quality names in our universe, Johnson & Johnson (JNJ) is a leading global health care company, with a diversified portfolio of pharmaceutical, medical device, diagnostic and consumer health products.

Several hurdles that include elevated competition, pricing pressures and struggles in the medical technology division, and opioid litigation have kept a lid on shares over the past couple of years.

Only down 12% YTD since rallying from a low of $111.14 on March 23, JNJ recently announced a leading vaccine candidate for the COVID-19 virus.

The firm expects to initiate human clinical studies by September 2020 at the latest and anticipates the first batches of a COVID-19 vaccine could be available for emergency use authorization in early 2021, a substantially accelerated time frame in comparison to the typical vaccine development process.

We believe the multi-year consolidation in shares offers investors a defensive, long-term growth opportunity at a very reasonable valuation. A broad revenue stream from its portfolio of stalwart products should also provide insulation from the economic downturn. Our target price is $157.18.

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