February is upon us, and with a new month comes new opportunities to pick standout stocks. Indeed, many investors may be hopeful that the incredible January we just had (the best for the Nasdaq Composite in more than two decades) can continue.
Of course, timing the market isn't something investors should really aim for (it's time in the market that matters more, as the saying goes), but given the lower valuations 2022 has provided, it's clear that investors are loading up on some beaten-down names.
In the biotech sector, there are plenty of these opportunities right now. Valuations have been hit hard as investors price in higher discount rates into their models. For growth stocks, that has meant significant valuation compression, particularly from the post-pandemic highs many stocks previously enjoyed.
That said, for investors seeking companies with strong track records, reliable management teams, and the ability to continue to grow over the long-term, here are two top biotech stocks to buy in February.
1. Bristol Myers Squibb
Pharmaceutical companies like Bristol Myers Squibb (BMY -0.30%) may be considered "everlasting" investments due to the relatively inelastic demand for their products. However, such companies must also remain competitive by continually innovating and introducing new medications. That can be both costly and difficult for investors to forecast, leading to some stock price volatility.
That said, one of the things I like about Bristol Myers is its demonstrated ability to remain competitive through continuous innovation. In the past year, the company received significant approvals, including for Sotyktu, a plaque psoriasis treatment; Opdualag, a cancer drug; and Camzyos, a medication for cardiovascular disease.
Although BMY stock appears to be trading around fair value, at roughly 25 times earnings, I like to compare a stock to its peer group to get an idea of where it's trading on relative levels. Given the average price-earnings multiple in the biotech sector of around 80 times, there's a lot to like about Bristol Myers from this perspective.
Adding in the company's 3.1% dividend yield and free cash flow yield of 8.8%, and the company's attractive fundamentals become even more clear.
2. Merck
Similar to Bristol Myers, Merck (MRK -0.05%) is another company long-term investors looking at the biotech sector can get comfortable with from a fundamentals perspective. The company's focus on providing sustainable growth is what many long-term investors stay for (as well as its relative valuation, which is even cheaper than Bristol Myers at only 17 times earnings).
The reason for the lower multiple is simple: Like Bristol Myers, Merck is contending with patent cliffs on a number of key drugs over the coming years. And while the biotech giant has plenty of balance sheet space for M&A activity to beef up its pipeline, investors appear to remain concerned about the overall landscape for this sector in the years to come.
Merck has been making progress in its bid to acquire its way back toward growth. The company's $1.35 billion acquisition of Imago recently closed. Additionally, the company has indicated its intention to continue investing in its pipeline and unlocking value via key research in certain key areas.
Currently, Merck has 112 late-stage drug development projects in its pipeline. Despite the impending patent expiration of its flagship cancer drug Keytruda in 2028, and the relatively underwhelming showing from its Lagevrio COVID-19 antiviral drug, the company's vast portfolio of upcoming drug candidates ought to keep investors sleeping soundly at night.
Where to go from here
The biotech sector is a tricky one to assess from a macro perspective as well as on a company-specific basis. That said, if I had to start my search for biotech stocks from scratch, I'd start with Bristol Myers and Merck. These giants have the leadership, pipelines, and growth outlook that long-term investors want. Additionally, these businesses continue to pump out cash and deliver it to shareholders in the form of dividends and buybacks.
These stocks have proven track records of success, reliable management teams, and promising growth potential. With the right strategy in place, investments in these two companies can bring significant returns. So if you're looking for biotech stocks to buy this month, add these two companies to your list.
