The combination of sovereign debt crises and slowing economic progress has created a perception that we are in a "perfect storm" leading up to a double dip. As a result, markets will likely have elevated volatility over the next few years. In my view, healthcare firms and their suppliers rank amongst the safest high yielding investments right now for several reasons -- chief among them being (1) low PE ratios, (2) generous dividend distributions, and (3), most importantly, future catalysts. When it comes to building a proper portfolio in the sector, investors should diversify across large pharmaceuticals, emerging players, and small cap firms supplying the majors. What follows is a list of companies that are safe against a double dip backdrop and have driven momentum.
This large company currently trades at just 9.4x forward earnings largely due to its patent cliffs. Exclusivity losses for Lipitor and other leading drugs have, to be sure, put a damper on the firm's defensive qualities. However, this has served to only discount the firm below intrinsic value at a time when the dividend yield stands at an impressive 4%.
At the end of the day, Pfizer still has $26.8B in cash to play with -- plenty to acquire catalysts and dissipate investor fatigue. Free cash flow -- while mostly flat over the last few years -- generated an impressive 11.2% yield relative to the current market cap. I find the intrinsic value of the stock to be just north of $30.10 based on a (1) 2.8% growth rate over 6 years, (2) historical operating metrics, (3) 2.5% perpetual growth rate, and (4) 9.3% discount rate. My free cash flow projections range from $16.1B to $18.5B -- mostly in-line with past performance.
Abbott Laboratories (ABT)
Abbott is another undervalued large drug manufacturer. It trades at 11.5x forward earnings and has been on an impressive run over the last six months, appreciating by 12.7% -- 1,086 basis points ahead of the Dow Jones. Abbott offers an impressive 3.3% dividend yield and is even less volatile than Pfizer at a beta of 0.32.
What makes Abbott a particularly strong investment is that it offers growth at an affordable price. Since 2007, EPS has grown by 50% while that EPS for Merck (MRK) and Pfizer have struggled over the same time. The firm has still been paying and increasing dividends for decades.
As the go-to source for phytochemical reference standards in the pharmaceutical market (among others), ChromaDex has direct access to the stable healthcare sector. By supplying north of 3K phytochemicals and 470 botanical reference materials to the major pharmaceutical players, the natural products company has established itself as the leader in its field. This grants the firm direct access to not only present demand but also future demand.
Fortunately, ChromaDex has licensed patents to commercially develop pterostilbene and market it as pTeroPure through the firm's BluScience division. Barriers to entry enable ChromaDex to yield sustainable income streams off of its informational advantage. Jeff Himmel, the mastermind behind Novartis' Ovaltine, is the firm's CEO and personally invested a million dollars. Latin American distribution through OPKO Health (OPK) further cements the small cap company as a firm trusted by the experts.
Emergent Health Corp (OTCPK:EMGE)
After rallying from recent lows, Emergent has yet again seen its fundamentals prevail. The active pipeline is backed by solid IP protection and an incentive-based supply system that management reports generating double-digit distributor growth. Per the SEC filing, preliminary unaudited revenues jumped up to 600% for the first quarter as demand rose both here and abroad for new products.
One new product that is likely to generate revenue synergies is Infinity Plus Anti-Aging Support, a special scientifically formulated product that improves health quality. Adult stem cells are a gift that naturally renews the body but becomes increasingly scarce in circulation over time. Infinity Plus Anti-Aging Support addresses this issue by helping to increase adult stem cell circulation. These stem cells can create new tissues for organs that increase telomere length. Telomere length shortens as organisms age and is the closest measure that science has found to determine lifespan across various organisms. Getting back to this article's central thesis, it should be noted that Emergent's innovation in regenerative medicine is particularly stable given rising demand from baby boomers. A strong pipeline driven by positive secular trends is central to outperformance.
Disclaimer: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. We are a consultant to a third-party representing ChromaDex and have received one thousand dollars for independent research. We are a consultant to Emergent Health and have been contracted ten thousand dollars. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and cannot be guaranteed by us to be fully accurate. Always discuss investments with a licensed professional before making any financial decision. Statements made herein are often "forward-looking statements" as defined under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.