Top 3 Healthcare Stock Picks for the New Year

Stocks to buy

After lagging most sectors in 2023, healthcare stocks could deliver substantial returns in 2024. The market has been overly pessimistic about the sector due to short-term challenges. However, some healthcare stock picks have deep pipelines and trade at bargain valuations.

In 2023, only GLP-1 makers Eli Lilly (NYSE:LLY) and Novo Nordisk A/S (NYSE:NVO) saw substantial gains. Other pharmaceuticals declined due to patent cliffs and Medicare price negotiations. Similarly, medical device companies, especially those focused on diabetes, were not spared as investors considered the threats of GLP-1s.

Furthermore, investors are wary of healthcare stocks in 2024. As usual, they expect these stocks to become the punching bags for politicians during the election season. However, this time, the fundamental picture is attractive. For instance, many large pharmaceutical and healthcare insurance companies are trading below 15 times forward earnings.

Besides the cheaper multiples, healthcare is a defensive sector. Usually, these stocks outperform cyclical sectors during downturns due to their revenue stability. Given the setup, the risk-reward is favorable for the following healthcare stock picks for 2024.

Pfizer (PFE)

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2023 was a year when almost everything went wrong for Pfizer (NYSE:PFE). Covid-19 revenues fell below expectations, forcing the company to lower its earnings guidance for 2023 and 2024. As a result, the stock has declined over 40% year-to-date.

Today, Pfizer is a bargain with a 5.9% forward dividend yield, making it one of the top healthcare stocks for 2024. Even after updating its guidance to reflect lower COVID-19 drug sales, the stock is attractive. The company sees 8-10% operational revenue growth, excluding revenues from Comirnaty and Paxlovid. What’s more, it expects 2024 EPS in the range of 2.00- 2.25. Thus, PFE stock trades at 14 times 2024 earnings.

The deep discount to the market multiple can close in 2024 if the market shifts to defensive stocks. First, relative valuation can support flows from expensive sectors to healthcare. Secondly, in case of an uncertain economic and political environment in 2024, top healthcare stock picks could catch a bid.

Furthermore, the recent $43 billion acquisition of Seagen provides optionality. First, the acquisition grants Pfizer a robust oncology pipeline. This could be a huge growth segment, considering that one in three people receive a cancer diagnosis in their lifetime. It brings antibody-drug conjugate technology that will enhance the drug maker’s position in cancer.

Most importantly, the deal adds four inline medicines: Padcev, Tivdak, Adcetris, and Tukysa. This will enhance its oncology franchise to over 25 approved biosimilars and medicines across 40 indications. Pfizer is one of the top healthcare picks for 2024 as the Seagen acquisition positions it as an oncology leader.

Biogen (BIIB)

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On December 7, Cowen named Biogen (NASDAQ:BIIB) one of its best ideas for 2024. The analysts believe that the stock’s outlook could improve materially with the launch of Leqembi for Alzheimer’s treatment. Additionally, they see great potential for Skyclarys for Friedreich’s ataxia.

Cowen’s $305 price target reflects the view that Leqembi will capture a significant share of the Alzheimer’s market. Indeed, they see market share expansion from 1% in 2024 to 8% in 2028. Additionally, they see growth in Skyclarys.

Biogen can achieve a 5% compounded annual revenue growth rate as these two drugs gain traction. Accordingly, this will end the revenue decline trend and pivot the company to growth. As of this writing, it’s one of the best healthcare stocks since it is valued at 16 times forward EPS. If the expected growth shows up, the stock could re-rate materially higher.

Management is also bullish on Biogen’s position in Alzheimer’s, as highlighted in Q3 2023 earnings. “We aim to further our leadership in Alzheimer’s disease by both driving the Leqembi launch and advancing the development of our tau-directed ASO…” said CEO Christopher A. Viehbacher.

Moreover, the company is rolling out the drug in new markets besides the U.S. In September, Japan approved Leqembi becoming the second nation to allow usage. Subsequently, Biogen launched the drug in the Japanese market on December 20. As Leqembi gains approval in more countries, BIIB stock will soar.

Danaher (DHR)

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Danaher (NYSE:DHR) is the premier asset in the life and sciences space. Bioprocessing remains its largest and fastest-growing market, operating in an oligopoly. It is among the four largest players with over 75% market share. It’s one of the best healthcare stocks for 2024 since its technology helps produce vaccines, biologics, and gene and cell therapies.

In 2023, Danaher’s revenue slowed due to several factors. First, there was lower demand for COVID-related diagnostics. Secondly, funding challenges for emerging biotech companies have strained the life science demand environment. Thirdly, demand slumped as contract development and manufacturing organizations burned through the excess inventories built up during COVID-19.

However, after a strenuous 2023, demand could rebound in 2024. Normalizing inventories, accelerating FDA approvals, and accelerating biologic prescription volumes will improve demand for consumables. Regarding drug approvals, management sees a tailwind for its bioprocessing tools from Alzheimer’s drug approvals.

Goldman Sachs believes the life sciences industry is entering a golden era of innovation. They expect tool revenues to normalize to 5% in 2025 and 2026. Notably, they expect the industry to outperform the overall healthcare sector.

According to management, Danaher could also see a margin uplift by integrating Pall and Cytiva (formerly GE Biopharma). Management expects a unified salesforce will drive sales through cross-selling. Furthermore, integrated research and development efforts will yield long-term cost savings.

As of this writing, Danaher trades at 18x normalized EBITDA. That’s a reasonable valuation for one of the highest-quality businesses. The life science market is on the path to recovery, and Danaher is one of the top healthcare stock picks.

On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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