2 Insanely Cheap Healthcare Stocks to Buy Now

While some stocks may be trading at low valuations for very good reasons, there is always more than just stock prices to consider when you are considering adding a company to your portfolio. When you invest in stocks for many years, the list of companies you are willing to invest capital in and hold for that long can become narrower.

Great companies don’t suddenly become less good because the tide of investor sentiment changes. Sometimes, high-quality companies that look like long-term buys can get beaten by the market for a variety of reasons. This can present an attractive opportunity for savvy investors.

With that in mind, let’s take a look at two beat-up healthcare stocks that could still be good investments if you plan to hold them for a few years or longer.

1. Pfizer

Pfizer (PFE 3.39%) has had an interesting run over the past few years, particularly as it navigated a surge in growth fueled by the success of its COVID-19 products that inevitably fell as the pandemic unfolded. Pfizer is currently trading at a price-to-earnings (P/E) ratio of around 13.1 as investor sentiment has driven the stock lower, but this could be an opportunity for forward-thinking investors.

Sales of the vaccine and oral antiviral drug have generated billions of dollars, generating record profits and revenues, and the company has put that capital to good use. It has made a string of high-profile acquisitions—including the $43 billion purchase of cancer drug maker Seagen—and has rapidly expanded its pipeline through those efforts, as well as through its own internal development.

Pfizer is currently in a transitional phase, a phase that is not uncommon in the cyclical nature of the pharmaceutical business. Healthcare leaders like Pfizer have a certain level of resilience in a wide range of environments because they make essential products and medicines that consumers need in all market environments.

The company received more FDA approvals than any other healthcare company last year and entered an aggressive 18-month lead period during which it introduced 19 new products or indications. Management sees significant opportunities for the company in multiple disease areas, and oncology (which has historically been a key focus for Pfizer) is one of them. Pfizer plans to bring eight or more blockbuster oncology drugs to market by 2030.

Another recent Pfizer acquisition, Biohaven Pharmaceuticals, brought a slew of new drugs into the game, including the migraine drug Nurtec, which alone is expected to generate peak annual sales of about $6 billion.

On the financial front, Pfizer posted revenue of about $55 billion in the past 12 months, along with cash flow from operations of about $8.6 billion. The company has also been hard at work cutting costs and expects to achieve at least $4 billion in net savings by the end of the year. Profits fell, but Pfizer posted net income of about $3.1 billion in the latest quarter, while revenue excluding COVID-19 products rose 11% year over year.

The coming quarters will require patience from shareholders as Pfizer tries to minimize unfavorable comparisons to pandemic-era growth while incorporating new product launches into the mix. In the meantime, the company remains committed to paying its dividend.

The current dividend yield, aided by recent weak stock market performance, is a whopping 5.6%. If you’re considering investing in healthcare stocks with a 5- to 10-year time frame, Pfizer’s short-term pullback shouldn’t dissuade you from buying shares of one of the world’s leading pharmaceutical companies.

2. CVS Health

CVS Health (CVS 4.01%) The stock has fallen by double-digit percentages over the past year, and at the time of this writing, its price-to-sales ratio is less than 1. The company has faced a number of headwinds over the past few years; these factors include a challenging macroeconomic environment, rising healthcare costs due to factors like increased Medicare utilization, and declining COVID-19 vaccination rates. The company has also had to lower its outlook multiple times, spooking some investors.

There are some compelling reasons not to ignore the business, though, and one is the significant moat the company has built with its presence in the health care industry. CVS is the nation’s largest pharmacy provider. As of the end of 2023, the company had more than 9,000 retail locations, hundreds of primary care clinics and more than 1,000 medical practices nationwide; its businesses serve more than 35 million consumers.

CVS’s retail pharmacy chain, pharmacy services, claims processing and prescription plan management are just some of how the company makes money. It divides its operations into four segments: health services, health benefits, pharmacy and consumer wellness, and “corporate/other.”

Its Health Services segment includes pharmacy benefit management solutions, both virtual and clinical health care services, and various provider solutions. The Health Care Benefits segment includes a diverse range of health insurance products, from medical, pharmacy and dental plans to Medicare Advantage and Medicare Supplement plans.

The pharmacy and consumer wellness segment includes offerings you may be familiar with, such as pharmacy services, patient care programs, a wide range of health and wellness products, and vaccination services. Miscellaneous services, such as retirement plans and long-term care insurance products, are part of the corporate/other segment.

CVS continues to account for the lion’s share of prescription drug revenue among U.S. pharmacy retailers, taking over 25% of that total in 2023 alone. Last year, CVS made two major acquisitions: the $8 billion purchase of home-care-focused health technology company Signify Health and the $10.6 billion purchase of Oak Street Health, a chain of primary care centers for older Medicare patients.

Those purchases also strained CVS’s balance sheet, but the long-term benefits of expanding primary care and virtual care services across patient segments could be worth the short-term impact. Growth has slowed compared with a few years, no doubt, but its balance sheet is still relatively strong.

In the first quarter of 2024, CVS had total revenue of about $88 billion, up about 4% from the prior-year quarter. Operating income was down year over year but totaled $2.3 billion. The company generated $7.3 billion in net income over the last 12 months. It also earned about $11 billion in cash flow from operations and $8.4 billion in free cash flow over the last 12 months.

CVS has been a loyal dividend payer for years and has consistently raised its payouts. Its payout ratio is around 44% of earnings, and its yield has risen to a tempting 4.5%, about three times higher than S&P500 If you are a long-term investor, you can find many reasons to like this stock, and its current low valuation could be a great opportunity.