While the FTSE 100 has disappointed during the course of 2014 and 2015, a number of pharmaceutical stocks have flourished. That’s at least partly because their earnings are less positively correlated with the wider economic outlook than for many of their index peers, with this quality likely to be a major asset for investors as the global economy offers a high degree of uncertainty over the medium term.
Plenty of scope
Of course, AstraZeneca‘s (LSE: AZN) rise of 15% since the start of 2014 (versus a fall of 4% for the FTSE 100) is due in part to the bid approaches that were a feature of last year. While Pfizer made multiple attempts to buy the UK-domiciled stock to benefit from a US tax loophole, the offer did not apparently sufficiently value AstraZeneca’s pipeline.
On this front, the company has made huge progress, with AstraZeneca buying up a number of companies and assets through which to deliver long term earnings growth. This was desperately needed following its tumble over the “patent cliff” and while positive earnings growth is yet to return it is due to take place within the next couple of years. This delivery on its planned strategy could cause investor sentiment in AstraZeneca to improve significantly and, with its shares trading on a price to earnings (P/E) ratio of just 15, there is plenty of scope for an upward re-rating.
In the meantime, AstraZeneca also offers a stable and relatively high yield. Its dividends are covered 1.5 times by profit, which indicates that its 4.4% yield is very sustainable. As such, investors waiting for the expected profit growth potential of the company are still receiving a sizeable income in the meantime.
Meanwhile, smaller pharmaceutical peers such as Alliance Pharma (LSE: APH) and Advanced Medical Solutions (LSE: AMS) have posted stunning share price rises since the start of 2014. They have risen by 33% and 62% respectively and, looking ahead, could be due for even further gains.
In Alliance Pharma’s case, its business model appears to be extremely effective, with the purchase of off-patent treatments providing relatively high, yet stable, margins. Furthermore, it has a highly consistent track record of making the right acquisitions at the right time to place the company on a clear long term path to growth.
Meanwhile, Advanced Medical Solutions has also made a series of excellent acquisitions that have contributed to annualised growth of 16% in earnings over the last five years. The recent approval of Resorba in the US gives Advanced Medical Solutions access to the $1bn US suture market and provides further growth opportunities in the long run.
Looking ahead, further growth is forecast for both stocks next year. With the outlook for the wider index being uncertain, less cyclical companies could gain in popularity, thereby pushing investor sentiment in both stocks even higher.
Peter Stephens owns shares of Advanced Medical Solutions, Alliance Pharma, and AstraZeneca. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.