By Credit Suisse touts drug stocks as a top place to be. These are our 2 favorites
Large-cap biopharma is a “key sector to own” right now, according to Credit Suisse — a view we share that is reflected in the composition of our new 10 core-holdings list . At the Club’s “Monthly Meeting” on Thursday, we designated Eli Lilly (LLY) and Johnson & Johnson (JNJ) as core holdings — a classification reserved for companies that are top operators in their industry with strong track records of creating shareholder value, among other characteristics. While core holdings are stocks we like for the long-term, we’ve also highlighted Eli Lilly and J & J in recent months for their defensive characteristics and said it makes them great places to be in this current market environment. That’s proven to be the case, as both stocks have outperformed the S & P 500 this year. Credit Suisse believes that the pharma sector can keep shining. “With the macro backdrop uncertainty unlikely to resolve over the next few months, we see Large-Cap BioPharma as a key sector to own for defensive exposure at a reasonable price,” the analysts there wrote. “History shows US Large-Cap Pharma outperforming in periods of macro volatility.” Analysts at Credit Suisse touted the industry’s “unchanged long-term secular growth drivers and high margins to absorb cost inflation,” which the firm believes warrants a valuation premium to other defensive sectors such as utilities and consumer staples. However, U.S. pharma currently trades at a discount: between 16 and 17 times forward earnings compared to 18 and 20 times. Another reason to like pharma is that the group can perform well even when recession fears don’t dominate because new drug launches can spark sales increases, the firm said. That bodes well for drugmakers with strong innovation pipelines, such as Eli Lilly. While the Club shares Credit Suisse’s favorable view on the pharmaceutical sector, we are not fully in alignment on which are the best stocks to own. We agree on Eli Lilly, which the firm rates as an outperform (equivalent to buy) with a $395 price target. Our price target on LLY is $380, but we have a 2 rating on the stock, meaning we’d wait to buy on pullbacks as shares have soared 30% year to date. That compares to the S & P 500 ‘s 17% decline in 2022. As Jim Cramer mentioned on Friday’s “Morning Meeting,” Eli Lilly is likely his favorite stock in the portfolio. Like the Club, Credit Suisse holds a positive view on Mounjaro — the company’s diabetes drug that’s shown immense promise as an obesity treatment, too — and Lilly’s latest experimental Alzheimer’s drug ahead of a pivotal data release expected next year. However, we differ on J & J, which will soon break itself up. J & J’s consumer unit will become a separate entity called Kenvue. The remaining J & J will be its current pharmaceutical and medical technologies divisions. We have a 1 rating on the stock, which we consider a buy at current levels. The Club price target is $205, representing a 17% upside from Thursday’s close. Credit Suisse rates J & J as neutral with a $170 price target, which is nearly 4% below where the stock closed Thursday. “We see value in the Consumer separation, which should drive improved valuation for the remaining businesses, but this could pressure new JNJ dividend,” Credit Suisse wrote, adding they think management’s 2025 pharma revenue target of $60 billion needs to be derisked. In our view, we think the breakup is a smart strategy, freeing up the management teams at both companies to allocate capital resources more effectively. The new J & J will be a more growth-oriented company, and as a result, investors may be willing to pay a premium for those future earnings, resulting in a higher multiple on the stock. As for J & J’s $60 billion pharma revenue target, we are comfortable with the current risk-reward landscape. The consensus analyst estimate is for $54.4 billion in pharma sales in fiscal 2025, according to FactSet. This means even if management falls short on that long-term forecast, it is unlikely to be an earth-shattering disappointment. If the company ultimately meets it, that could be an upside surprise. (Jim Cramer’s Charitable Trust is long LLY, JNJ and HUM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Large-cap biopharma is a “key sector to own” right now, according to Credit Suisse — a view we share that is reflected in the composition of our new 10 core-holdings list.
