Pharmaceutical companies have successfully produced effective COVID-19 vaccines with astounding speed.
They achieved the very best-case scenario.
Given how front and center these companies have been over the past year, you would think investors would have some love for them.
Strangely, that is not the case.
The MVIS US Listed Pharmaceutical 25 Index currently trades at the biggest discount to the S&P 500 that we have seen in 20 years.
While the S&P 500 trades at a rather expensive 22 times projected 2021 earnings, Big Pharma trades at just 13 times projected 2021 earnings.
That is a big discount. The pharmaceutical sector trades at one of the lowest valuations of any group in the market.
The last time the sector was this cheap in absolute terms was 2011.
Not coincidentally, 2011 was a great time to be a buyer of these stocks.
From 2011 through the middle of 2015, pharma stocks doubled the performance of the S&P 500.
As per usual, investors who paid attention to value were well-rewarded.
Now the pharma sector is cheap again.
Since that great pharma run that ended in 2015, the stock prices of these companies have badly trailed the market…
While the S&P 500 has almost doubled since 2011, the pharma sector hasn’t done anything.
In fact, since mid-2015, the pharma sector is actually down slightly.
After widely outperforming from 2011 to 2015, the sector was no longer cheap – it was expensive.
The performance from 2015 onward has been the product of an expensive starting point.
Now, after the sector underperformed for almost six years, these stocks are cheap again.
Now is the time to be a buyer again…
Someone Else Has Noticed the Value in Pharma Stocks
Without a lot of fanfare, the Oracle of Omaha himself has started putting some money to work in the pharma sector.
As of his last required reporting date of December 31, 2020, Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) owns more than $7 billion worth of stock of three Big Pharma companies.
The companies are Merck & Co. (NYSE: MRK), AbbVie (NYSE: ABBV) and Bristol Myers Squibb (NYSE: BMY).
Buffett has been steadily accumulating shares of these companies since the third quarter of 2020.
Normally, Buffett makes large, concentrated bets on individual stocks.
The fact that he has spread this bet across three companies shows that he thinks the entire sector represents good value.
An obvious way to play the value in this sector is to jump on Buffett’s coattails and buy the same three stocks.
All three are very cheap relative to their expected 2021 earnings.
AbbVie trades for less than nine times what it is expected to make this year. Bristol Myers Squibb trades for barely more than eight times earnings, and Merck trades for just more than 11 times earnings.
For perspective, that means all three companies trade for half the valuation of the overall market.
They come with big dividends too…
AbbVie yields 4.8%, Bristol Myers Squibb yields 3.2% and Merck yields 3.5%.
So these three stocks have Buffett’s stamp of approval, very cheap valuations and big dividend yields.
That is a lot to like… but there’s more.
These companies have great balance sheets that are loaded with cash and carry little debt.
That gives them dry powder to scoop up smaller, faster-growing biopharma businesses that can add to their revenue-generating drug portfolios.
In a market where so many stocks are looking very expensive, this sector represents good value.
Good investing,
Jody