While some stocks may trade at cheap valuations for very valid reasons, there's always more than share prices to consider when you're considering a business to add to your portfolio. When you invest in stocks for many years at a time, the list of companies you're willing to put capital into and hold for that long may narrow.
Great companies don't suddenly become less so because the tide of investor sentiment shifts. Sometimes, quality businesses that look like long-term buy propositions may be beaten down by the market for various reasons. That can present a compelling opportunity for shrewd investors.
On that note, let's take a look at two discounted healthcare stocks that could still be quality buys if you have a hold horizon of several years or more.
1. Pfizer
Pfizer (NYSE: PFE) has had an interesting time of it the last few years, particularly as it dealt with a surge of growth from the success of its COVID-19 products, which inevitably fell as the pandemic evolved. Pfizer is trading at a forward price-to-earnings (P/E) ratio of around 13.1 right now as investor sentiment has driven shares downward, but that could present an opportunity for forward-thinking investors.
The sales of its vaccine and oral antiviral drug brought in billions of dollars, creating record profits and revenue, and the company has put that capital to good use. It made numerous high-profile acquisitions -- including a $43 billion purchase of cancer drugmaker Seagen -- and it's rapidly expanded its pipeline through these efforts, as well as via its own internal development.
Right now, Pfizer is in a period of transition, a phase that's not uncommon in the cyclicality of the pharmaceutical business. Leaders in the healthcare field, such as Pfizer, have a level of resilience in a wide range of environments, as they're making essential products and medicines that consumers need in all market environments.
The company garnered more approvals from the U.S. Food and Drug Administration last year than any other healthcare business, and it entered an aggressive 18-month launch period during which it introduced 19 new products or indications. Management sees significant opportunity for the company in multiple disease areas, with oncology (already a key focus for Pfizer historically) being one of them. Pfizer plans to have eight or more blockbuster oncology drugs on the market by 2030.
Another recent acquisition of Pfizer's, Biohaven Pharmaceuticals, brought multiple new drugs into the mix. Those included migraine medication Nurtec, which alone is expected to bring in peak annual sales of around $6 billion.
On the financial front, Pfizer has brought in revenue of about $55 billion over the trailing 12 months, along with operating cash flow of close about $8.6 billion. It's also been working diligently to cut costs, and expects to deliver at least $4 billion in net savings by the end of this year. Profits are down, but in the recent quarter Pfizer delivered net income of about $3.1 billion, while revenue excluding its COVID-19 products rose 11% year over year.
The coming quarters will require patience from shareholders, as Pfizer works to minimize unfavorable comparisons to pandemic-era growth while incorporating new product launches into the mix. In the meantime, the company has remained committed to paying out its dividend.
The current dividend yield, helped by recent lackluster share performance, is a whopping 5.6%. If you're looking at a five- to 10-year investment in a healthcare stock, Pfizer's near-term period of adjustment shouldn't dissuade you from buying shares of one of the world's leading pharmaceutical businesses.
2. CVS Health
CVS Health (NYSE: CVS) stock is down by double-digit percentages over the last year, and at the time of this writing is at a price-to-sales ratio of less than 1. The company has had to contend with numerous hurdles the last few years; these factors include challenging macroeconomic conditions, rising healthcare costs driven by factors such as increased Medicare utilization, and declining COVID-19 vaccination. The company has also had to slash its guidance multiple times, which has spooked some investors.
However, there are several compelling reasons not to overlook this business, and one is the significant moat the company has built with its footprint in the healthcare industry. CVS is the largest pharmacy services provider in the country. It finished 2023 with over 9,000 retail locations, hundreds of primary care medical clinics, and over 1,000 walk-in medical clinics across the nation; its businesses serve over 35 million consumers.
CVS's network of retail pharmacy stores, pharmacy services, claims processing, and prescription plan management is just part of how the company makes money. It divides its operations into four segments: health services, healthcare benefits, pharmacy & consumer wellness, and "corporate/other."
Its health services segment includes pharmacy benefit management solutions, healthcare services both virtually and in a clinical setting, and various solutions for medical providers. The healthcare benefits segment includes an incredibly diverse range of health insurance products, ranging from medical, pharmacy, and dental plans to Medicare Advantage and Medicare Supplement plans.
The pharmacy & consumer wellness segment features offerings that you may know well, such as its pharmacy services, patient-care programs, a wide selection of health and wellness products, and vaccine services. Miscellaneous services such as pension plans and long-term care insurance products are part of its corporate/other segment.
CVS still accounts for the lion's share of prescription drug revenue among pharmacy retailers in the U.S., capturing more than 25% of this total in 2023 alone. Last year, CVS completed two major acquisitions: an $8 billion purchase of health tech company Signify Health, focused on home care, and a $10.6 billion purchase of Oak Street Health, a network of primary care centers for older patients on Medicare.
These purchases have also placed a dent in CVS's balance sheet, but the long-term benefits of boosting its primary care and virtual care services across different patient segments may be well worth the short-term impact. Growth has slowed from a few years ago, no doubt, but the balance sheet is still relatively strong.
In the first quarter of 2024, CVS brought in total revenue of about $88 billion, up about 4% from the prior year's quarter. Operating income was down year over year, but totaled $2.3 billion. Over the trailing 12 months, the company has generated $7.3 billion in net income. It's also raked in approximately $11 billion of operating cash flow and $8.4 billion in free cash flow in the last 12 months.
CVS has been a faithful dividend payer through the years, and consistently raises its payout. Its payout ratio is around 44% of earnings, and the yield has risen to a mouthwatering 4.5%, roughly three times that of the S&P 500 . If you're a long-term investor you may find a lot to like about this stock, and its current depressed valuation could be a golden opportunity.
Should you invest $1,000 in Pfizer right now?
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Rachel Warren has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
2 Incredibly Cheap Healthcare Stocks to Buy Now was originally published by The Motley Fool