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Throughout financial history, equity markets have navigated bull and bear cycles. The same holds true for various sectors. After an extended bull market, there tends to be a price and time correction phase in various sectors.
One secret to successful investing is to identify sectors that have been depressed for an extended period. Stocks in this sector tend to be undervalued, and once sentiments reverse, the rally can be massive. My focus in this column is on undervalued pharma stocks to buy.
To put things into perspective, the S&P Pharmaceuticals Select Industry Index has delivered total annualized returns of 3.83% in the last 10 years. For the same period, the S&P 500 index has delivered total annualized returns of 11.68%. Clearly, the pharmaceutical sector has been a big underperformer.
Given the business developments, these pharma stocks can trend higher in the next few years. Overall returns are likely to beat index returns. Thus, it makes sense to consider some of the undervalued pharma stocks to buy for the portfolio.
Pfizer (NYSE:PFE) stock has been in a downtrend, but the correction seems to be overdone. At a forward price-earnings ratio of 10.9, PFE stock is massively undervalued. Additionally, the stock offers investors an attractive dividend yield of 4.4%.
Through 2030, Pfizer has planned its growth strategy focusing on two areas. First, the company will continue to invest in research and development to deepen the product pipeline. Pfizer already has 101 potential drug candidates, with 12 drugs in the registration phase and 23 in phase three trials.
As new products are launched, revenue growth is likely to be steady. Pfizer is targeting $20 billion in incremental revenue from new molecular entities by 2030. Furthermore, Pfizer has been active on the acquisition front in the last year. The company targets $25 billion in incremental revenue from new business developments through 2030.
With these developments, PFE stock is poised for a reversal rally. I would hold with patience for the next 24 to 36 months for high total returns.
AstraZeneca (NASDAQ:AZN) is another undervalued pharma stock to buy for high total returns. In the last 12 months, the stock has been marginally higher by 13%. However, I believe that the best part of the rally is still to come. AZN stock also offers an attractive dividend yield of 2.6%.
It’s worth noting that the company has guided for healthy revenue growth. Through 2025, AstraZeneca expects to deliver a low double-digit CAGR. Beyond this period, the company believes it’s poised for an industry-leading growth rate. If this holds, AZN stock is attractive at a forward price-earnings ratio of 20.2.
I believe that the growth expectations are realistic. For 2023, AstraZeneca has a phase three pipeline of 30 drugs. Of this, the company believes that 10 drugs have blockbuster potential. The over pipeline currently stands at 178 projects. With a strong global presence and visibility for the continued launch of drugs, AstraZeneca has a bright outlook.
Merck (NYSE:MRK) is an undervalued quality pharma stock even after a 23% rally in the last 12 months. MRK stock trades at a forward price-earnings ratio of 16.5 and offers a dividend yield of 2.54%.
In terms of growth, there are two catalysts. First, Merck has 30 programs in phase three and 80 in phase two. The late-stage clinical development program looks attractive and catalyzes revenue growth. It’s worth noting that Merck has invested $11.4 billion in research and development in the last 12 months. Significant R&D investments will continue to boost the company’s late-stage pipeline.
Further, Merck announced the acquisition of Prometheus Biosciences (NASDAQ:RXDX) for a consideration of $10.8 billion. The acquisition will boost the company’s presence in the immunology segment. With strong financial flexibility, inorganic growth will continue to support the company’s growth outlook.
On the date of publication, Faisal Humayun 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.