You'd think that companies with long, successful track records and market caps in the hundreds of billions of dollars would be viewed as relatively formidable. However, that's not always the case.
Three Motley Fool contributors have picked surprisingly underrated stocks to buy right now. Here's why they chose big pharma stocks Merck (MRK -0.09%), Novo Nordisk (NVO -3.03%), and Pfizer (PFE -1.65%).
Image source: Getty Images.
This stock remains a great long-term bet
Prosper Junior Bakiny (Merck): There are at least two challenges Merck, a pharmaceutical giant, is facing right now. First, the company will lose patent exclusivity for its cancer drug Keytruda, by far its most significant growth driver, by 2028. Second, even before the Keytruda patent cliff, some new medicines could hit the market that would challenge the drug's dominance in some niches, including non-small cell lung cancer, one of its most important indications. These issues explain why Merck's shares have lagged the market over the past year.
However, the stock is arguably a steal at these levels -- Merck's forward price-to-earnings ratio of 9.4 looks dirt cheap compared to the healthcare sector's average of 16.5. Merck appears especially attractive when considering that the drugmaker can find ways to overcome the challenges it faces. Merck is developing a subcutaneous (SC) version of Keytruda, which is expected to extend its patent life well into the 2030s, while retaining many of the indications of the previous formulation.
SC Keytruda has already produced strong results in clinical trials, showing non-inferiority compared to its predecessor, while significantly reducing the time it takes for physicians to administer it and monitor patients afterward.
Furthermore, Merck should also develop new products. The company has enhanced its pipeline through acquisitions. Other medicines like Winrevair, which targets pulmonary arterial hypertension, will be meaningful growth drivers for years.
Lastly, Merck remains a solid dividend stock. The company's payouts have increased by 39.3% in the past five years. Its forward yield of 4% is much higher than the S&P 500's average of 1.3%, while its payout ratio of almost 46% leaves ample room for more hikes. Merck's long-term prospects remain strong. Investing in the company today could yield superior returns over the next decade.
Novo Nordisk is a growth stock that may be too cheap to pass up
David Jagielski (Novo Nordisk): Despite being one of the largest healthcare stocks in the world, Novo Nordisk is looking pretty underrated right now. In the past year, its shares have plummeted by more than 50%, with its valuation now below $300 billion.
Investors have been underwhelmed with recent phase 3 trial results related to its weight loss drug, CagriSema. It helped patients lose an average of 22.7% of their body weight, which was less than the 25% that was previously expected. It's a nominal miss but a miss nonetheless. And at a time when rival Eli Lilly (NYSE: LLY) has been delivering more encouraging results, it's an example of why investors have been bearish on the Danish company of late.
But Novo is still doing fairly well, with plenty of growth opportunities on the horizon. It's still expanding its popular weight loss drug, Wegovy, to new markets. And it has a promising next-gen treatment, amycretin, which has shown, in an early-stage trial, that it can help people lose 22% of their weight after a period of 36 weeks. An oral version of amycretin is expected to begin phase 3 trials early next year, and if it proves to be the real deal, that could quickly make Novo Nordisk a hot stock to own again.
The company has generated strong profit margins of 35% over the trailing 12 months. With excellent growth opportunities still ahead, the stock may be a steal of a deal for long-term investors: It's currently trading at less than 18 times its trailing earnings.
Wall Street sees this stock's potential, but many investors don't
Keith Speights (Pfizer): Not everyone thinks Pfizer is underrated. The consensus Wall Street 12-month price target for the stock reflects an upside potential of nearly 20%. However, many investors don't seem to be on the same page as analysts, considering that Pfizer's share price remains well below its 52-week high.
Admittedly, Pfizer faces challenges. The company has experienced some pipeline setbacks, notably including throwing in the towel on its oral obesity candidate, danuglipron. Several of its top products lose patent exclusivity over the next few years, too, with blockbuster drugs Eliquis and Ibrance at the top of the list.
But there's still much to like about Pfizer. Its growth prospects are better than you might think. Sales continue to soar for drugs including Nurtec ODT, Padcev, and Vyndaqel. Pfizer anticipates four regulatory decisions and nine key late-stage clinical study readouts this year.
Pfizer's dividend remains very attractive with a forward yield of 6.79%. CEO Albert Bourla said at the Goldman Sachs (NYSE: GS) Global Healthcare Conference last month, "[W]e are going to maintain a growing dividend."
The stock's valuation is another big plus. Pfizer's shares trade at roughly 8.7 times forward earnings. This reflects a lot of pessimism -- too much, in my view.
