President-elect Trump's promises of a one-time tax repatriation holiday has bumped up share prices across the board in recent weeks, but the healthcare sector is still peppered with a variety of cheap stocks you can buy right now. Small-cap biotech Celldex Therapeutics (CLDX 2.29%) is punching far above its weight. Its much larger and highly profitable industry peer Gilead Sciences (GILD 0.28%) is ultra-cheap. If you find drugmaker stocks too volatile, the gigantic drug distributor McKesson (MCK 0.47%) is well positioned to provide steady growth for years.
Image source: Getty Images.
Whether you're an income investor seeking steadily rising dividends or on the hunt for explosive growth potential, there's something for you in the best sector to ride the aging demographic shift in the U.S. and beyond. Let's take a look.
1. Celldex Therapeutics
After an upsetting late-stage clinical trial failure this spring, this oncology-focused biotech stock is still surprisingly cheap. The company's enterprise value (a theoretical purchase price similar that factors in cash and debt) is just $184.9 million at recent prices.
You might be shocked to learn failed brain cancer candidate Rintega was entirely unrelated to the unique entities Celldex is developing right now. In the lead is a novel protein attached to a lethal dose of chemo that it releases inside tumor cells. Glembatumumab vedotin, or "glemba," is the only candidate in clinical studies that targets gpNMB, a protein found on the surface of several different tumor types, including a difficult-to-treat group of breast cancer patients. Glemba is in a clinical trial with this group that could lead to an approval if the results fall in line with previous observations.
I'd say glemba alone more than justifies the company's low valuation, but there's a lot more in its pipeline. Varlilumab, or "varli," has piqued the interest of Bristol-Myers Squibb and Roche. Both big pharmas are testing varli in combination with their most promising new cancer therapies, Opdivo and Tecentriq, and success with either could propel the smaller stock into the stratosphere.
Image source: Getty Images.
Following a recent acquisition, Celldex Therapeutics boasts a whopping seven drugs in clinical-stage development. There are no guarantees that any will generate sales for the company, but I'd say the market has severely underestimated their risk-adjusted value.
2. Gilead Sciences
This biotech's reluctance to pull the trigger on a major acquisition in what management considers an overbought market hasn't played well with the market. Its stock has given up about 30% this year because of fear its top line will continue shrinking like a cheap sweater in a hot dryer.
Without a thrilling candidate in development, and hepatitis C sales down sharply in the third quarter, this company should have investors concerned. Now that the stock is trading around 6.7 times trailing earnings, though, I'd say the fear is far overblown.
Buying Gilead Sciences stock at this knockdown price could deliver market-beating gains even if the company's bottom line remains flat into infinity. Its operations generated a staggering $18 billion in free cash flow over the past year, and it's sitting on about $31.6 billion in cash. Some of that cash is held overseas, but if President-elect Trump delivers a promised cash repatriation tax holiday, the company could find itself especially flush.
We all like to see the numerator side of the earnings-per-share equation rise, but shrinking the denominator works equally well. Over the past three years, Gilead has lowered its outstanding share count by 13.8%, while initiating a quarterly dividend that offers a 2.6% yield at the moment.
Image source: Getty Images.
Arguably few companies understand liver diseases better than Gilead, and its headway into the non-alcoholic steatohepatitis (NASH) indication have largely flown under the radar. This disease affects an estimated 15 million Americans, representing a severely underserved space worth perhaps $15 billion annually.
A mid-stage study with selonsertib recently produced dosage-dependent reductions in liver damage in patients severely affected by the disease, suggesting Gilead has a shot at being first to crack the NASH case wide open. At such a low stock price, though, the company doesn't even need to do so in order to deliver impressive gains over the long term.
3. McKesson
This is the largest of three major distributors that control a combined 85% of America's wholesale prescription-drug market. When McKesson last reported earnings, fiscal second-quarter earnings per share fell sharply to $1.35 from $2.65 during the same period last year. A non-cash goodwill impairment charge tore a $1.24 per share chunk out of the bottom line, so it's not as bad as it looks on the surface.
Investors were even more frightened by a 7.8% reduction in the upper end of the company adjusted earnings forecast for the fiscal year. McKesson cited unfavorable branded pharmaceutical pricing trends, which have been increasingly austere this year.
Image source: Getty Images.
While end-payer pushback will probably pause McKesson's growth story for a moment, it's important to look at the bigger picture. The big three distributors operate on razor-thin margins. Over the past 12 months, McKesson recorded a $3.21 billion operating profit from a staggering $194.3 billion in revenue. There simply aren't any companies outside the big three that can source, store, and deliver immense volumes of drugs at comparable prices and still squeeze out a profit.
At about 17 times trailing earnings, this well-positioned stock is less expensive than it's been in years. It's not as cheap as Celldex or Gilead, but this healthcare stock is still far less expensive than the average stock in the benchmark S&P 500 -- currently at a frightening 24.2 trailing P/E ratio.
Drug pricing pressure might slow down growth temporarily, but economies of scale are a durable advantage that should allow McKesson to earn outsize returns on deployed capital. That's a recipe for steadily growing investor returns that you can reasonably expect for years to come.
