Few sectors have escaped the gravity of the investing black hole known as the coronavirus pandemic. Nearly every stock has plunged, with a 20% drop constituting a relatively mild decline. There have been bounces, including renewed buying on anticipation of a huge coronavirus rescue bill. However, it's impossible to know how long any bounce will last while the number of COVID-19 cases continues to rise.
There's one group of stocks, though, that I think merits investors' attention even in the midst of the chaos. Here are three reasons I believe pharma stocks are a buy right now.
1. Resilient businesses
It's important to separate businesses from stock performances. Although share prices should roughly indicate the potential for a business, sometimes they don't. We're seeing such a time right now among pharma stocks.
Although pharma stocks have tanked, their businesses are trucking right along (at least, that's the case for most of them). Sure, some drugmakers have been negatively affected in some ways by the coronavirus pandemic, but there are plenty of other aspects of their businesses that are resilient in the current market environment.
Eli Lilly (NYSE:LLY), for example, paused enrollment in most of its clinical trials. Some, particularly generic drugmakers, have had their supply chains disrupted because of the COVID-19 outbreak in China. The situation in China is also likely to make a dent in sales for several large companies, including Pfizer (NYSE:PFE), which has its Upjohn segment headquartered in China. It's also possible there could be a dip in sales for prescription drugs because of patients' worries about their medications spreading the novel coronavirus.
Overall, though, pharma companies are in much better shape than many others. Most people won't stop taking their prescription drugs, especially those for serious conditions, because of the pandemic. And when the current crisis is over, drugmakers' revenue should quickly rebound to normal levels.
2. Attractive valuations -- and dividends
I'm combining these two pluses for pharma stocks because they're intertwined. As the share prices of most pharma companies have dropped, their stock valuations have become really attractive. These lower share prices have also pushed dividend yields significantly higher.
As a case in point, Pfizer's shares currently trade at only 12 times expected earnings. The big drugmaker's dividend yield stands above 5%. But there are even more attractive pharma stocks than Pfizer when it comes to valuation and dividend yield.
AbbVie (NYSE:ABBV), for example, boasts a super-low forward earnings multiple of 8.6. Its dividend yields over 7%. Investors who buy AbbVie right now will lock in fantastic dividend payments going forward. Considering that AbbVie has raised its dividend for an impressive 47 consecutive years, it's likely the dividend will keep moving higher.
3. Solid growth prospects
Many pharma stocks have solid growth prospects regardless of how long it takes to beat COVID-19. Of course, some companies have stronger opportunities than others.
Of the drugmakers that have already been mentioned, I think Lilly's growth prospects over the next five years might be the best. Sales for the company's diabetes franchise, which includes Trulicity and Jardiance, are soaring. Lilly's immunology drugs Taltz and Olumiant also continue to pick up momentum.
Pfizer's growth rate will pick up significantly after it merges Upjohn with Mylan. And while AbbVie faces sales erosion for Humira due to biosimilar competition, its new immunology drugs Rinvoq and Skyrizi and the pending acquisition of Allergan should help considerably.
My favorite growth story among pharma stocks, though, is Bristol Myers Squibb (NYSE:BMY). Thanks to the acquisition of Celgene last year, BMS has multiple pipeline candidates that could be huge winners soon. These include multiple sclerosis drug ozanimod and cancer cell therapies liso-cel and ide-cel.
Look to the future
I think pharma stocks will roar back in the not-too-distant future. Buying shares of well-run companies with solid current product lineups and strong pipelines should pay off for investors in the long run.