Follow the money. And when there's a lot of money, follow especially closely.
Billionaire investors are putting plenty of money into healthcare stocks these days. For the most part, however, they don't tend to agree on exactly which healthcare stocks to buy. Allergan (AGN), Johnson & Johnson (JNJ -0.69%), and Cardinal Health (CAH 0.16%) are the exceptions.
Multiple billionaire investors bought these stocks recently. Here's who did -- and why they probably found these three healthcare stocks so attractive.
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Allergan: Growth plus value
David Tepper has an estimated net worth of $11 billion. Seth Klarman is believed to have a net worth of roughly $1.5 billion. In the fourth quarter of 2016, both Tepper's Appaloosa Management and Klarman's Baupost Group added Allergan shares to their holdings.
Why do these billionaires like Allergan? My guess is that the biggest reason Tepper and Klarman bought the stock is Allergan's potential for growth.
Over the last 14 months, Allergan has completed 18 major regulatory submissions. The company has 11 significant pipeline catalysts on the way in 2017, including three expected new regulatory submissions. Allergan claims half a dozen late-stage candidates that could realistically become blockbuster drugs if approved.
I suspect that Tepper and Klarman also like Allergan's valuation. The stock currently trades below 14 times projected forward earnings. That relatively low multiple, combined with solid growth prospects, is enough to attract the attention of any investor, billionaire or not.
Johnson & Johnson: Solid and steady
A couple of other billionaires think highly of Johnson & Johnson. James Simons' net worth is reportedly close to $18 billion. Prem Watsa is a relatively "poor" billionaire, with an estimated net worth of $1.1 billion. Simons' Renaissance Technologies hedge fund and Watsa's Fairfax Financial Holdings bought J&J stock in the fourth quarter of 2016.
It's not too difficult to see why Simons and Watsa agree about Johnson & Johnson. The healthcare giant could be a poster child for consistency. J&J has grown adjusted earnings for 32 years in a row. The company has increased its dividend for a remarkable 54 consecutive years.
Although two of Johnson & Johnson's business segments aren't generating much growth, its pharmaceuticals segment is growing at a solid pace. And despite anemic growth rates, the consumer and medical devices units are quite profitable and produce plenty of cash flow.
Simons and Watsa, like many other investors, probably expect Johnson & Johnson to put that cash to good use in the coming years. That seems to be a reasonable expectation. In addition to funding its growing dividend, the company repurchased $9 billion of its stock last year.
Cardinal Health: Boring but beautiful
Seth Klarman thought highly enough of Cardinal Health to add the stock to Baupost Group's portfolio in the fourth quarter. Ray Dalio, whose net worth is pegged at nearly $17 billion, must have been thinking along the same lines, as Dalio's Bridgewater Associates increased its stake in Cardinal Health.
You might think of Cardinal Health as just a boring drug wholesaler. So why would billionaire investors like Klarman and Dalio like the stock? I'd say it was because Cardinal Health has a solid business model that cranks out cash year after year.
Cardinal Health isn't likely to generate sizzling earnings growth, but Wall Street analysts expect the company to grow earnings by more than 9% annually on average over the next five years. That's not bad, especially considering that the company also pays a dividend with a current yield of 2.1%.
Shares are also relatively inexpensive. Cardinal Health stock trades at less than 14 times estimated forward earnings. While the drug wholesaler isn't likely to be Klarman's or Dalio's biggest performer, it's one that should provide steady returns.
Billionaires' best pick
Of these three favorite healthcare stocks among billionaire investors, I think that Allergan is the best pick. My view is that the drugmaker should generate higher total returns over the next few years than Johnson & Johnson or Cardinal Health. Even if you don't have billions to invest, Allergan looks like a good choice.
