Value stocks are poised for a strong decade. The simple reason is that the Federal Reserve is highly unlikely to spur another growth stock boom by lowering interest rates to the effective floor in the years ahead.
Which value stocks are best positioned to capitalize on this favorable long-term dynamic? These three undervalued healthcare stocks offer a compelling mix of passive income, top-line growth, and deep value.
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1. AbbVie
Developing a blockbuster medication (a drug with greater than $1 billion in annual sales) requires a tremendous amount of talent, hard work, cash, and flat-out luck across every single layer of the pharma value chain (preclinical studies, human trials, regulatory affairs, and marketing). On top of all that, pharma companies have a limited window of opportunity to maximize profits on the drug before its patent portfolio expires.
AbbVie (ABBV -4.69%) is going through this dynamic process right now. The company's top-selling immunology medicine, Humira, lost patent protection in the European market in 2018 and in the U.S. at the start of 2023. AbbVie is thus tasked with replacing a large chunk of revenue from a drug averaging nearly $20 billion in annual sales.
To accomplish this goal, AbbVie spent $21 billion to acquire the groundbreaking blood cancer drug Imbruvica and another $63 billion for Allergan's global aesthetics business and its neuroscience assets. In addition, AbbVie developed its next-generation immunology assets -- commercially known as Skyrizi and Rinvoq -- to shore up this flagship franchise once Humira biosimilars (generic biologics) become a competitive reality.
Despite all the company's preparation for this eventuality, however, the market hasn't been kind to AbbVie's stock during the opening months of 2023. The company's shares have dipped by nearly 5% since the start of the year. Meanwhile, the Nasdaq Composite has gained almost 10% over this same period.
Bargain hunters shouldn't hesitate to take advantage of this recent weakness. AbbVie is a Dividend King, meaning that it has doled out consecutive dividend increases for at least 50 straight years. Moreover, the company offers a healthy 3.84% annualized yield at current levels. That's far superior to the 1.674% average yield of dividend-paying S&P 500 listed stocks. Lastly, AbbVie is forecast to return to strong levels of top-line growth by 2025.
2. Amgen
Biotech pioneer Amgen (AMGN 0.23%) has also lost ground to start the year. Thanks in large part to an underwhelming 2022 Q4 earnings report, the biotech's stock has slipped by 11.6% so far in 2023.
Amgen is a product churn story at this point in its life cycle. Aging former stars like the white blood cell booster Neulasta are in the process of handing over the proverbial reins to newer growth engines such as the cardiovascular drug Repatha and the osteoporosis treatment Evenity.
The hiccup in this story -- at least so far -- is that some of these newer growth products have run into fierce competition right out of the gate. Amgen, in turn, is only expected to post low-single-digit top-line growth over the next few years.
Bolt-on acquisitions like the recent Horizon Therapeutics transaction could accelerate the drugmaker's return to solid levels of top-line growth. But acquisitions also tend to take several quarters to contribute positively to a company's financial results.
Nonetheless, Amgen's stock is undoubtedly in bargain territory right now. The biotech's shares are being valued at approximately 13 times forward earnings, which is well below the average within its immediate peer group (16.4). Moreover, Amgen's stock pays out a well-above-average dividend yield of 3.63% on an annual basis.
3. Pfizer
Pfizer (PFE 1.01%) has shed over 20% of its value in 2023. The drugmaker's shares have been trending lower over an anticipated drop in COVID-19 product sales (Comirnaty vaccine and Paxlovid treatment) in 2023. Compounding matters, Pfizer is also barreling toward a set of major patent expirations between 2025 and 2028.
Wall Street, in effect, doesn't appear confident in management's plan to buy its way out of this jam through heavy investments in its internal pipeline and external business development opportunities. Pfizer, nonetheless, thinks it has tacked on a whopping $10.5 billion in 2030 revenue through the recent acquisitions of Arena, Biohaven, Global Blood Therapeutics, and ReViral.
Pfizer's stock is significantly undervalued right now, with its shares trading at roughly 12 times forward earnings. Its declining share price has also ratcheted up the company's annualized dividend yield to an eye-catching 4% at current levels.
In other words, this bearishness is probably way overdone at this point. Pfizer, after all, has the financial firepower, experience and economy of scale to overcome even these daunting headwinds.
