2014 has been a very different experience for investors in AstraZeneca (LSE: AZN) (NYSE: AZN.US) and GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US). Thats because, while shares in the former have risen by a stunning 26%, the latter has seen its share price fall by 11% year to date. Despite this, both companies appear to be worth buying and appear to be the two best healthcare stocks your money can buy. Heres why.
Long-Term Potential
While news items and investors constant shift between fear and greed will cause share prices to fluctuate in the short run, the pace of earnings growth over the long run is usually the most important reason for significant changes in a companys share price. For pharmaceutical stocks such as GlaxoSmithKline and AstraZeneca, the pipeline of potential new drugs is the key to driving top and bottom line growth.
So, its extremely encouraging to see that both companies have a very bright future in this regard. GlaxoSmithKline has developed a highly diversified and impressive pipeline over a number of years, while AstraZeneca continues to try and overcome its patent cliff. With GlaxoSmithKline selling off its consumer brands (such as Ribena and Lucozade) to focus on research and AstraZeneca using its financial firepower to address the loss of key blockbuster drugs, both companies can look ahead with optimism to a long-term future of growth.
Changing Sentiment
A couple of years ago, AstraZeneca was in the doldrums and investors were shunning its shares. Today, it is a hot ticket and has been the subject of numerous bids by US rivalPfizer. Part of the reason for the turnaround in investor sentiment has been the companys willingness to make acquisitions in order to counter its patent cliff. Sound buys such as the other half of the diabetes joint venture with Bristol-Myers Squibb have caught investors attention and allowed shares to rise to an all-time high in 2014. Further quality acquisitions (and bid approaches) could push shares even higher.
Meanwhile, GlaxoSmithKline has gone the other way. It was a no-brainer for many investors a year or two ago but has seen market sentiment weaken hugely due to allegations of bribery. Certainly, such allegations are bad news for the company and its investors, but ultimately (as mentioned) GlaxoSmithKlines pipeline will be the decider of long-term profit growth. Therefore, the current low ebb of sentiment could be a top notch opportunity to buy shares in the company at a great price.
Valuation
With shares in the two companies trading on price to earnings (P/E) ratios of 17.1 (AstraZeneca) and 15 (GlaxoSmithKline), you could be forgiven for thinking that neither appears to be attractively priced. However, with sector peerShiretrading at a P/E of over 20 when it was approached by AbbVie earlier this year, its clear that top quality pharmaceutical stocks can demand far higher ratings than those currently present at AstraZeneca and GlaxoSmithKline.
Indeed, as a result of their considerable long-term potential and relatively attractive valuations, AstraZeneca and GlaxoSmithKline could prove to be the two best healthcare stocks your money can buy.
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Peter Stephens owns shares of AstraZeneca and GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
