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3 Bargain Stocks to Buy in a Market That's Priced for Perfection

Motley Fool - Thu Sep 21, 12:54PM CDT

Stock valuations are at historically high levels. However, that doesn't mean you can't find stocks worth buying.

Three Motley Fool contributors identified bargain stocks to buy in a market that's priced for perfection. Here's why they picked AbbVie(NYSE: ABBV), Gilead Sciences(NASDAQ: GILD), and Pfizer(NYSE: PFE).

A new era for a longtime winner

Keith Speights (AbbVie): AbbVie's shares currently trade at a forward earnings multiple of only 13.8. That's cheap compared to most stocks, including most big pharma stocks.

Why such a discounted valuation for AbbVie? The company's sales are sinking as its top-selling drug, Humira, now faces biosimilar competition in the U.S.

Although AbbVie is certainly in a new era after relying primarily on Humira for its revenue for years, the big drugmaker is well prepared. Two successors to Humira are already on the market -- Rinvoq and Skyrizi. AbbVie expects the two drugs will together generate peak annual sales that are greater than what Humira ever achieved.

The company has also made shrewd acquisitions in recent years. Its biggest deal was the buyout of Allergan in 2020, which added products including Botox, migraine drug Ubrelvy, and antipsychotic drug Vraylar. As a result, AbbVie isn't nearly as dependent on Humira as it used to be.

AbbVie expects to soon return to delivering growth that will continue at least through the end of the decade. In the meantime, it's a Dividend King with an especially juicy yield of more than 3.8%. AbbVie is one of those rare stocks that offers something for income, value, and growth investors alike.

A steady and reliable biotech stock

Prosper Junior Bakiny (Gilead Sciences): Gilead Sciences stock has underperformed the market over the past three years, but here's the good news. Investors can now grab the company's shares at relatively attractive levels. Gilead Sciences is trading at about 12 times earnings estimates -- the average forward price-to-earnings ratio for the biotech industry is 15.3.

Stocks that trade at bargain valuations often do so because their prospects look poor, but that's hardly the case with Gilead Sciences. The drugmaker remains an excellent pick for investors looking for solid, blue chip dividend payers.

The company remains the leader in the HIV market thanks to blockbuster products such as Biktarvy and Descovy. The newly approved Sunlenca -- the first six-month, long-lasting HIV regimen -- should become a growth driver in the coming years.

Gilead Sciences' HIV unit is the most important part of its business, but the drugmaker's oncology segment is also growing in importance. These are medicines with an ongoing need. Though Gilead Sciences' business may not be the most exciting in the world, the fact that it offers necessary goods is a selling point for many investors. Further, the company boasts a deep pipeline across several therapeutic areas beyond oncology and HIV.

Gilead Sciences has increased its dividend by 74% in the past decade and the stock currently offers a yield of 3.9%. Income seekers will find what they are looking for with this company, as will those searching for stocks that can provide safety and consistency in the long run in this volatile environment.

A cheap growth stock that investors are underestimating

David Jagielski(Pfizer): Investors aren't pricing perfection into Pfizer's stock but instead are preparing for a lot of challenges and headwinds. The healthcare stock is trading at only 9 times its trailing earnings and has a forward earnings multiple of 10. The stock screams "bargain" but investors don't appear to be interested. That could be a huge mistake.

Pfizer is undoubtedly facing a tough road. It may lose up to $18 billion in revenue due to losses in exclusivity. COVID-19 vaccine revenue will also fall significantly now that the government is no longer buying and stockpiling doses.

Those are concerning headwinds, but they're not enough to make investors fear owning a piece of this hugely profitable business. Pfizer has been loading up on acquisitions while also developing its own pipeline of drugs. Among the most promising is its pending $43 billion deal for oncology company Seagen, which makes antibody-drug conjugates that target cancer cells. The transaction could unlock significant growth opportunities for Pfizer.

Internally, the company has 90 projects in its pipeline, including 23 that are in phase 3 trials.One promising oral drug in the pipeline is danuglipron, which has shown that it may be as effective for weight loss as Ozempic. Pfizer also recently obtained approval for blood cancer therapy Elrexfio, which, at its peak, may generate $4 billion in revenue. In total, CEO Albert Bourla says the company can add $25 billion to the top line by the end of the decade.

While investors appear to be focused on the near-term challenges, they are overlooking the many growth opportunities that are on the horizon for Pfizer. If investors were pricing in a more promising outlook, the stock could easily be trading at more than double its current valuation.

As a bonus, this is also a fantastic income stock to own as Pfizer's dividend yield is 4.8%. This looks to be one of the best healthcare stocks to buy right now.

10 stocks we like better than Pfizer
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David Jagielski has no position in any of the stocks mentioned. Keith Speights has positions in AbbVie and Pfizer. Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Gilead Sciences, Pfizer, and Seagen. The Motley Fool has a disclosure policy.

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