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3 Healthcare Stocks That Are Too Cheap to Ignore

Motley Fool - Sun Jun 25, 7:45AM CDT

Whether you're an investor or a consumer, it's a safe bet that you like to buy stocks or goods and services at a discount. It's just basic human psychology. This is where the value-investing strategy can come into play.

The trick to mastering the investing strategy is first recognizing that there is a fine line between value and a value trap. There may be perfectly acceptable reasons for why a stock might be cheap, such as mounting risks to the business, poor growth prospects, or a huge debt load.

Here are three attractively valued stocks for value investors to consider that don't appear to fit in the value trap category.

A pharmacist serves a customer.

Image source: Getty Images.

1. CVS Health: An all-in-one health insurer and pharmacy chain

Serving over 100 million people in the United States annually through its Caremark prescription-management business and Aetna health insurance business, CVS Health(NYSE: CVS) is a leading health solutions company. These businesses support the company's $90 billion market capitalization, which makes it the third-largest healthcare-plans provider in the country behind UnitedHealth Group and Elevance Health.

As the U.S. population continues to age, Caremark and Aetna should both see a rise in demand for their services. That is precisely why analysts believe that the company's non-GAAP (adjusted) diluted earnings per share (EPS) will compound by 4.5% annually over the next five years.

What's more, the stock offers a 3.5% dividend yield -- double the S&P 500 index's 1.6% payout. So it looks like CVS can provide both high starting income and decent payout-growth potential. This is especially the case considering that the dividend-payout ratio is expected to come in at around 28% in 2023. That should be modest enough to leave plenty of capital for business expansion, debt repayment, and dividend growth.

CVS Health's lowly forward price-to-earnings (P/E) ratio of 7.7 is far less than the healthcare plans industry's average of 13.1. This steeply discounted valuation is probably why analysts have an average 12-month price target of $98, which would be 40%-plus upside from the current share price.

2. Thermo Fisher: Supplier to the pharmaceutical industry

As pharmaceutical companies continue to dedicate more resources to research and development (R&D) over time to tackle various ailments, Thermo Fisher Scientific(NYSE: TMO) could be a major beneficiary. This is because the company provides pharmaceutical and biotech customers with a variety of items necessary to carrying out R&D, like centrifuges and molecular biology reagents.

Such a business model builds a great deal of consistency into the company's financial results. And with a market value of $203 billion, Thermo is the most dominant player in the diagnostics and research industry.

For these reasons, analysts believe the company's earnings will rise by 8.6% annually through the next five years. For context, that is better than the diagnostics and research industry's average growth outlook of 7.2%. Yet, shares of Thermo can be picked up at a forward P/E ratio of 19.9 -- moderately less than the 22.6 average for its industry peers.

3. Bristol Myers Squibb: An excellent big pharma pick

Speaking of pharma companies, Bristol Myers Squibb(NYSE: BMY) and its $135 billion market cap positions it as the eighth-biggest drugmaker in the world.

The company has no shortage of immensely popular drugs supporting its big market value: Its three top-selling medicines are each on track to top $5 billion in sales in 2023 (Eliquis, Opdivo, and Revlimid). Not to mention that several other drugs are on pace to surpass $1 billion in sales this year, including its anemia treatment, Reblozyl.

Looking beyond this year, recently launched drugs like Sotyktu and Breyanzi also appear set to be eventual blockbusters. And with more than 50 compounds currently in development, Bristol Myers should be well-positioned in the medium term and beyond as well. Not surprisingly, analysts are expecting mid-single-digit annual-earnings growth from the company over the next five years.

Paired with a 3.5% dividend yield that is easily supported by earnings, this makes the stock a solid pick for investors searching for a mix of income and future growth. Last but not least, Bristol Myers' forward P/E ratio of 8 is a downright bargain compared to the drug manufacturers' industry's average of 13.4.

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Kody Kester has positions in Bristol-Myers Squibb, CVS Health, and UnitedHealth Group. The Motley Fool has positions in and recommends Bristol-Myers Squibb and Thermo Fisher Scientific. The Motley Fool recommends CVS Health and UnitedHealth Group. The Motley Fool has a disclosure policy.

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