Buying quality stocks when they're unpopular can be very rewarding.
A good place to look for unpopular stocks these days is in the healthcare sector, as Robert F. Kennedy Jr.'s nomination and confirmation as U.S. Secretary of Health and Human Services have cooled investor sentiment in healthcare stocks. Kennedy is a vocal critic of the pharmaceutical industry, and many leading pharmaceutical stocks are trading well off their highs.
I think leading pharmaceutical companies Pfizer (PFE +1.71%) and Novo Nordisk (NVO 1.25%) could be the best-performing value stocks over the next five years.
Only time will tell whether I'm right, but there's a compelling pitch for each stock.
From pandemic hangover to oncology juggernaut
Pfizer was a big winner during the COVID-19 pandemic. It developed a vaccine (Comirnaty) and treatment (Paxlovid) for COVID-19 that totaled over $56 billion in sales in 2022, over half the company's total revenue that year. This marked a peak for Pfizer, which has seen its top and bottom lines collapse as those temporary sales dried up. However, the tide has started to turn. Pfizer's revenue and earnings began growing again in 2024.
The company has spent the past few years positioning itself for growth in oncology, including a blockbuster $43 billion acquisition of Seagen to bolster its oncology pipeline. Pfizer anticipates strong growth in oncology over the next five years. Management expects to double its patient base by 2030 and anticipates at least three new blockbusters (drugs with over $1 billion in annual sales). Oncology revenue increased 25% in 2024, so growth is already picking up steam.
NYSE: PFE
Key Data Points
Analysts estimate Pfizer will grow earnings by almost 14% annually over the next three to five years. So far, investors haven't noticed. The stock trades near its lowest price in over a decade, and the dividend yield (6.7% as of this writing) hasn't been this high since the financial crisis in 2007-2009. Pfizer's earnings easily cover the dividend, so this seems more like headline fears keeping the stock down than financial risks.
At its current price-to-earnings ratio, Pfizer's PEG ratio is only 0.6. Anything under 1 is considered cheap, and I frequently buy quality stocks with PEG ratios of 2 to 2.5. Pfizer is astoundingly cheap and offers double-digit earnings growth potential plus a massive dividend yield. Assuming Pfizer delivers as hoped, the stock could realistically double or better over the next five years.
A weight loss sensation with more tricks up its sleeve
Novo Nordisk's roots go back decades, as its expertise in insulin and diabetes propelled it to become one of the world's largest pharmaceutical companies. In recent years, GLP-1 agonists have taken society by storm. The weight loss drugs treat diabetes and obesity by suppressing appetite and slowing digestion. Novo Nordisk's Ozempic -- approved to treat diabetes -- is arguably the most popular; its name has become synonymous with GLP-1 agonists.
Management estimates Novo Nordisk has approximately 63% of the GLP-1 agonist market via Ozempic and Wegovy, a similar drug approved for treating obesity. It competes primarily with Eli Lilly, which owns an estimated 34% of the market. Research from Grand View Research estimates GLP-1 agonist sales in North America could triple from $41 billion last year to $126 billion in 2030, averaging 18% annualized growth over the next five years.
NYSE: NVO
Key Data Points
Novo Nordisk is developing Amycretin, a pill-form GLP-1 agonist that could attract more patients than existing injectable products. Although the GLP-1 agonist opportunity is still nascent, Novo Nordisk has already established itself as a leader. Analysts estimate that these tailwinds will help Novo Nordisk grow earnings by an average of 24% annually over the next three to five years.
Yet, the stock is down almost 50% from its high. The stock's PEG ratio is just 0.8, signaling jaw-dropping value.
Why is the stock down? Well, I mentioned the pessimism across the healthcare sector. In addition, Novo Nordisk can't produce enough semaglutide (the base drug in Ozempic and Wegovy) to satisfy demand, leading to competition from compounding pharmacies selling generic versions through regulatory loopholes. The good news is that much of this is short-term noise that should quiet down as Novo Nordisk increases its production capacity. When sentiment improves, Novo Nordisk could roar back. A bargain valuation and rampant earnings growth could make for market-crushing investment returns through 2030.
