10 Drug Stocks for Safety and Yields

06/24/2011 9:00 am EST

Focus: STOCKS

Moby Waller

Editor, Wyatt Research

Big pharma is an attractive destination for traders and investors looking for safety, yields, and solid value in the current market. Here is a basket of ten stocks and a sector ETF to buy on pullbacks.

There's a core group of ten major pharmaceutical companies publicly traded in the US, all of which have dividend yields over 3% and are within relative range of their 52-week highs. 

This group has been a market outperformer in calendar-year 2011 thus far. Given the economic uncertainty and global debt worries, this sector has been a good safety and value play for many investors and traders.

These top-performing drug stocks are:

  • Sanofi-Aventis (SNY)
  • Pfizer (PFE)
  • Abbott Labs (ABT)
  • Eli Lilly (LLY)
  • AstraZeneca (AZN)
  • Johnson & Johnson (JNJ)
  • GlaxoSmithKline (GSK)
  • Bristol-Myers Squibb (BMY)
  • Novartis (NVS)
  • Merck (MRK)

Below is a table with some of the key fundamentals on these names. You can see the average P/E is around 10, dividend yield of 4.4%, and the group as a whole is outperforming the S&P 500 Index (SPX) in 2011. Merck (MRK) is the only one underperforming the broad market. 

Profit margins and return on assets (ROA) are healthy, in my view, but sales growth, while varied, is a low 3%, on average. This combo of strong dividends with the other fundamentals puts this group firmly in what I would call the "value" camp.

You can see that in uncertain economic times, the big pharma sector could be an attractive investment for those looking for safe yields and relatively low downside risk. 

Also, don't forget that the US is basically a "script-mad" country (and increasingly, the world is) where more and more people are taking pharmaceuticals of one sort or another.

NEXT: A Big Pharma ETF That Has the Right Prescription

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I previously wrote about this sector in terms of the Pharmaceutical HOLDRs Trust (PPH) in April when it had broken out of its range and was showing technical strength. (See “Pharma ETF Has the Right Prescription.”) The holdings of PPH vary from the ten names above, but many of these stocks are holdings in the ETF. 

You can also see above that the dividend yield (data from FinViz) and year-to-date (YTD) performance are in line in terms of PPH versus this basket of stocks.

In the chart below, you can see that PPH had a nice run-up after we wrote bullishly about it. It has since been pulling back in a downtrending channel, basically in line with the market. Recent strength in PPH has brought it to the top of its recent range, but it hasn't yet shown signs that it will break out of this channel to the upside (potential resistance around the middle bands/exponential moving averages (EMAs) and daily Percent R (%R) hasn't cleared the key 50 mid-level yet).

The $66 level is a great entry point for PPH in my analysis, but it may not reach that low any time soon. As an alternative, I would target the $67/$68 area as a good possible long entry point. The $68 level is logical given that it is a 50% retracement of the big rally we saw that took PPH from $63 to $73 from March to May of this year.

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The Bottom Line

Fundamentals make the big pharma an attractive sector for value/safety plays in the current environment, but the chart hasn't shown that the bottom is definitively here yet. 

In my analysis, PPH and the basket of ten stock names mentioned above are likely attractive purchases on further pullbacks, such as to the $67/$68 area in PPH.

By Moby Waller of BigTrends.com

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