What do UnitedHealth Group (NYSE:UNH), CVS Health (NYSE:CVS), Celgene Corp. (NASDAQ:CELG), Regeneron Pharmaceuticals (NASDAQ:REGN), GW Pharmaceuticals plc (NASDAQ:GWPH), and Cara Therapeutics (NASDAQ:CARA) all have in common? They make Motley Fool analyst Kristine Harjes and contributor Todd Campbell's list of top stocks to buy in 2017.
In this clip from our Industry Focus: Healthcare podcast, Kristine and Todd discuss the relative risk of these stocks and why they could be top performers. Tune in to learn which companies deserve a spot in your portfolio in 2017.
A full transcript follows the video.
This podcast was recorded on Dec. 21, 2016.
Todd Campbell: I thought it would be fun and maybe kind of helpful for listeners to break it into three groups: less risky, more risky, and most risky. Because, we know, no matter what, when we're talking about stocks, there's going to be risk. No one has a crystal ball. I went through, and for my least risky pick of 2017, I settled on UnitedHealth, which is the largest U.S. health insurer. The reason that I picked UnitedHealth is because of a few different reasons. One, they backed away significantly from the Obamacare exchanges after losing hundreds of millions of dollars in providing those plans to patients. They will not have that drag on their earnings in 2017. And, following the election of Donald Trump and the potential repeal of Obamacare, to me, it feels like it's going to be less of an adjustment, since they were already planning for that to wind down. It's a very profitable company. They make a lot of money. Actually, over the course of the next year or so, industry watchers think they could earn $9.50 per share. That's up from $9.14 30 days ago.
Kristine Harjes: Going into 2017, the biggest thing to watch for the insurers is going to be Obamacare, what's going to happen with Obamacare when Trump comes into office. I think, looking at all the moving pieces there, you will mostly, on net, see a benefit to insurers if Obamacare is rolled back. One place that I would point out to be a little bit skeptical of is if Medicaid shrinks. Medicaid is not super important for UnitedHealth, but it is a quickly growing segment for them. So, if that were to go away, it would be a little bit of a hit on them. But, then again, like I said, I think the end of Obamacare would ultimately be a good thing for insurers, depending on what it's replaced with, of course. With that, I actually would push back a little bit on UNH being the less-risky category, just because of that uncertainty. This is a stock that's up 37% in 2016. It's trading at a premium valuation. I like the stock a lot; I'm not sure I would label it as least risky. Does that make sense?
Campbell: Yeah, I totally get that. That's what makes this show great, sometimes we disagree! And who knows? There is risk associated with this stock and the insurers broadly. You make a great point on Medicaid. Ultimately, I think shares could easily be trading at a P/E (price/earnings ratio) of 20X on trailing earnings. If they can deliver the $9, then you're talking about a share price of about $180 at some point next year, which would be a nice gain from where we are today. The proof will be in the pudding. Will they be able to deliver the kind of earnings growth that everybody wants them to deliver?
Harjes: Yep, all great points. I also picked my own for the least-risky category. Here, I picked CVS, the pharmacy retailer that you all know and love. I think they have a demographic tailwind coming on for them. You have an aging population, that means more chronic diseases, so, more prescription sales, more people coming into their Minute Clinics. This is the second-largest pharmacy, the second-largest pharmacy benefits manager [PBM] in the United States. They are also the largest long-term care and specialty pharmacy. This is just a huge diversified business. They have a 2.13% dividend. I don't think they have a ton of regulatory risk. If anything, I actually think that regulators will be happy with CVS because they are working to drive down the cost of healthcare through their PBM division, which is the majority of their business. What do you think, Todd?
Campbell: There's no question that pricing remains a big issue. Insurers want lower prices. As long as CVS is helping them deliver that, it's a very intriguing stock.
Harjes: Right. And they're down pretty substantially. They are down 18% this year, mostly due to competitive pressure. So, I think they are a pretty low risk pick for 2017. Let's move on to our middle category, the slightly riskier category. What do you have for me?
Campbell: I love Celgene. It's a stock we've talked a lot about on the show before, and will probably talk a lot about again. It's one of the biggest biotechs out there. They have a huge presence in cancer, specifically multiple myeloma, and they have a tremendous number of different collaborations and pipeline candidates that are going to be rolling out data over the course of 2017 and 2018 that can move this stock higher. Given the fact that they're targeting a disease that requires treatment, they've escaped some of the pushback on pricing that maybe others have endured more of, so they're OK on that front. There are very few biotech companies out there that have offered up guidance from 2017 to 2020. Celgene is forecasting pretty remarkable top- and bottom-line growth. If they can hit their internal forecasts, I think that investors will be rewarded.
Harjes: Right. You hit on great points. Two of my favorite parts of Celgene, as you mentioned, their collaboration. This is just a brilliant strategy on their part. Pay a little bit of money to have, potentially, huge upside and minimize your downside. That's just smart right there -- it's smart business. The other thing is their outlook. Projecting to 2020, as you said, is crazy in the biotech world. They're forecasting an EPS of at least $13 in 2020. That's pretty fantastic. And management has shown in the past that they are pretty responsible with their estimates. I think that's a good pick.
Campbell: Yeah. And one thing that people will want to watch, because this could really affect how risky the stock is next year, is they're supposed to roll out some data on Ozanimod and multiple sclerosis in the first half of the year. If that data is bad, obviously, it will be bad news for this stock.
Harjes: Right. One more pick in the middle category, your riskier category, is Regeneron. The reason that I pick this one is they have got 2017 catalysts galore. They have their new cholesterol-lowering drug, Praluent, is set to release cardiovascular data which could potentially justify its kind of high price tag of $14,600, and could potentially turbocharge pretty lackluster -- thus far -- sales. They also have a PDUFA date coming up in March for a drug called Dupixent. This is for a severe form of eczema. They have a resubmission of another drug that had previously been turned down by the FDA in October due to manufacturing issues. They think they've figured out the manufacturing issues and should be able to get the green light now. They're also another stock that's entering 2017 with a depressed price, they're down 33% since a year ago.
Campbell: You're going with these value-oriented growth stocks, I see.
Harjes: Yeah, I am. Actually, all three of my picks are down quite a bit this year. I'll use that to kick right into my pick for the most risky stock. This is a company called Cara. They are down 45% year to date. That is a tough pill to swallow. This is a company that IPO'd in February of 2014, and they're down 11% since their IPO, despite a lot of pipeline progress. This is, essentially, a one-trick pony. Again, they have the 2017 catalysts coming up. The drug that they're making is called CR845. Essentially what makes this intriguing is, it's an opioid pain medication, but it doesn't have the side effects of typical opioids, meaning it's not addictive. If you've been reading health news lately, you know this is a humongous problem in the United States, opioid addiction. They are looking to find a drug that can cure the pain without having those potentially negative side effects. So far, the drug has cleared a ton of trials. They're looking at it in post-operative pain. They're also looking at it in a chronic skin itching condition, as well as chronic pain. The latter thing there is an enormous indication, 100 million prescriptions written in the United States every single year for chronic pain. They should be getting data out in that indication in the first half of next year. They'll also be getting data in the skin itching condition trial, and also in post-op pain by the end of 2017. Definitely a high-risk, high-reward stock to watch.
Campbell: Yeah, Kristine, there's definitely a major need for new drugs that can work the way that opioids do, or, deliver the efficacy that opioids do, without that addiction. That's, I'd say, the main connection between my most risky pick and your most risky pick there is that we both targeted clinical-stage companies that have the potential to meaningfully change a big blockbuster indication.
Harjes: Right. That's why they're the riskiest picks, but they're also still picks.
Campbell: Absolutely. In my view, the most risky stock to consider in 2017 is going to be GW Pharmaceuticals. We've talked about this stock on the show before. They're working on a marijuana-based medicine to treat epilepsy. They've already succeeded in three phase 3 trials. They have one more phase 3 trial reading out data early next year. They want to file with the FDA as quickly as possible. It wouldn't shock me if the FDA gives an accelerated review to this drug because there's a massive need, especially in childhood forms of epilepsy that are resistance to current anti-epileptics. There's a huge need here for new treatment options. It seems like, so far, Epidiolex could fill that need. We'll have to see. The epilepsy indication is big. It's billions of dollars. There's a history of various epilepsy drugs at least reaching nine-figure sales, and there are some that have eclipsed that number. The devil will be in the details with what the label says and when this drug gets to market and what the pricing will be. But, if they can win approval next year, then this stock could trade higher.
Harjes: This is, for sure, a high-interest story to watch. They could completely reshape epilepsy. We should be looking at a potential approval by the end of 2017.