So far, this year is looking very different from 2013.
The stock market is no longer moving in just one direction. Risks in emerging markets took a bite out of January, sending many stock indices down for a loss on the month.
Besides political unrest in Turkey, Ukraine and Argentina, investors are concerned that the Chinese economy is showing new signs of weakness. The Fed bond tapering this past week also added fuel to the fire.
It’s in times like this that investors tend to move some of their capital into defensive sectors. [inlinetweet prefix=”” tweeter=”@SovereignInvest” suffix=”#Investments”]There’s one such sector that has been outperforming the market for the last three years.[/inlinetweet]
And I’ve just found a great way to play this sector …
A Safe Haven in the Volatility Storm
Investors tend to flock into health care stocks when things get shaky in the markets. That happens because the health care industry is relatively immune to the state of the economy.
Recently, health care stocks have outperformed the market in both good and bad times. As you can see in the chart below, U.S. stocks have gone up 45% in the last three years, while the health care sector has jumped more than 85%.
Not all companies in the sector have skyrocketed. There’s one pharmaceutical company that’s still trading 25% below its 2010 peak. I believe this stock has a lot of catching up to do.
I’m talking about Teva Pharmaceutical Industries (NYSE: TEVA), the largest generic drug maker in the world, with sales in 60 countries and 17 research and development centers. It has a 20% global market share in the generic category of pharmaceuticals.
The company has been struggling with high operational costs and increasing competition in generics. As a result, the stock hasn’t performed well in the last three years.
But Teva is showing signs of a turnaround …
First, the company has a new leadership: Erez Vigodman will become the new CEO this month. He has a great track record at executing successful turnaround strategies, such as cutting costs and restructuring operations.
Second, the company has just announced that the U.S. Food and Drug Administration approved a new dose of its multiple sclerosis (MS) drug, Copaxone. This is important because Copaxone is Teva’s best-selling product, generating $4.2 billion in sales last year. This new dosage will help the company defend its market share in the MS arena.
A Cheap Stock That Pays 2.5%
Teva’s recent challenges have left the stock cheap. It’s trading at a forward price-to-earnings (P/E) ratio of 9.7, which is much lower than the industry’s average. In fact, Teva’s P/E represents a discount of 50% to its peers.
I think this extremely low valuation will not last. Almost 80% of Teva’s sales come from the U.S. and Europe, both regions where the aging population is set to explode, increasing the demand for drugs. Besides that, efforts to rein in the rising cost of health care will see more patients replace high-cost brand-name drugs with generics.
Teva currently pays a dividend yield of 2.5%, but that dividend doesn’t tell the whole story.
The company returns money to shareholders in the form of share buybacks. It began actively repurchasing shares in 2010. Since then, it has repurchased about $2.6 billion in stock.
Once we account for the buybacks, the total yield actually jumps to 5.3%. So Teva is essentially a company with a cheap stock price that cares about returning value to its shareholders.
And it has just started a turnaround rally.
The stock is already up 22% since November — a time when the health care sector climbed just 6%. But it’s not too late to buy it. If Teva returns to its 2010 high, we’re talking about an additional gain of 36%. Buy Teva at market and use a 25% trailing stop-loss to manage your risk.
Editor, Pure Income
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