There's nothing that markets dislike more than uncertainty. And over the last year and counting, the market has been fixated on concerns such as the prospects of a recession and geopolitical turmoil in Eastern Europe. This is precisely why the S&P 500 index has dipped 10% over the last 12 months.
But amid the market sell-off, the healthcare sector as a whole has held up quite well. Up 22% and 5% in the past year, McKesson (MCK 0.62%) and Sanofi (SNY -0.47%) are two stocks that have crushed the broader markets. Here's why their momentum could continue over the next few years.
1. McKesson: A Buffett stock with a promising future
If you're like most people, you have probably frequented a pharmacy or hospital at some point in your life. And there's a good chance that the medical distributor known as McKesson had an impact on your life without your even knowing it. That's because the company provides more than 200,000 customers, like pharmacies and hospitals around the world, with over 300,000 medical products that are then sold by these customers to patients. This explains how McKesson's $50 billion market capitalization makes it about as large as its next two medical distribution competitors combined.
It's not a well-kept secret that Warren Buffett of Berkshire Hathaway prefers to invest in high-quality businesses with impressive growth prospects. That's probably why the holding company owns a 2.1% stake in McKesson worth nearly $1.1 billion. Due to the increased frequency of chronic medical conditions, the global healthcare distribution industry is expected to grow from nearly $1 trillion in 2023 to $1.4 trillion by 2028. The company's leadership status, paired with the positive industry outlook, explains why analysts believe its non-GAAP (adjusted) diluted earnings per share (EPS) will grow by 11.9% annually over the next five years. Putting this into perspective, the medical distribution industry's average annual earnings growth projection is just 10%.
And investors can scoop up shares of McKesson at a forward price-to-earnings (P/E) ratio of 13.7, which is only a bit more than the medical distribution industry average forward P/E ratio of 13.4. That's what makes the stock a buy for both growth investors and value investors.
Image source: Getty Images.
2. Sanofi: A diversified drugmaker with encouraging growth prospects
Sanofi's $135 billion market cap positions it as the ninth-largest pharmaceutical company on the planet. The company is most known for its star immunology drug co-owned with Regeneron called Dupixent, Lantus insulin, and its influenza and polio/pertussis vaccine franchises. In all, nine blockbuster products (defined as at least $1 billion in annual sales) were major contributors to the $45.2 billion in revenue that Sanofi recorded in 2022.
And the French drugmaker is more than just its current product lineup; Sanofi has over 80 projects in various stages of clinical trials. The most prominent projects currently in clinical development include Dupixent's COPD indication and the company's respiratory syncytial virus vaccine candidate being developed with AstraZeneca named nirsevimab.
This is why analysts are projecting that Sanofi's earnings will grow by 12.3% each year over the next five years. That's well above the drug manufacturers' industry average of 6.9%. Yet, the stock's forward P/E ratio of just 10.9 is far less than the industry average of 13.9. Above-average growth potential coupled with a below-average valuation makes Sanofi a no-brainer buy for growth investors, in my opinion.
