Major Dow Jones Industrial Average companies in the health care sector saw a relatively strong 2016, with most posting a solid gain on the year. One of these stocks was actually a top Dow performer, while the rest settled near the middle of the pack. As the Trump administration is taking shape, the general sentiment in the health care sector is that the new president will be pro-business.

Along with the changing of the guard for the U.S. head of state, many investors have rotated their portfolios as well. Analysts have even chimed in saying that investors are looking at potentially high-growth industries under Trump, such as financials, industrials and namely health care.

24/7 Wall St. has evaluated a bullish and bearish case for each Dow stock in 2017. In this report we have included the cases for the health care components of the Dow: Johnson & Johnson (NYSE: JNJ), Merck & Co. Inc. (NYSE: MRK), Pfizer Inc. (NYSE: PFE) and UnitedHealth Group Inc. (NYSE: UNH). A couple of these companies even made the 2017 Dogs of the Dow.

It is worth noting that there is inherent risk going forward with Johnson & Johnson, Merck and Pfizer, should there be any failed clinical trials or U.S. Food and Drug Administration (FDA) setbacks. Jefferies also explained that there could be more risk with some of the U.S. companies that have been supported by dividend yields, such as Johnson & Johnson, Merck and Pfizer, which could suffer if the Federal Reserve raises rates faster and further than expected.

The Dow closed out 2016 at 19,762.60 on December 30. It may not have hit the elusive 20,000 mark, but it ended the year with a gain of 13.4% from the 17,425.03 close on the last trading day of 2015. This was quite close to the 24/7 Wall St. forecast of 19,700, but we still have a case that can be made for up to Dow 22,000 late in 2017. The S&P 500 closed the year at 2,238.83, up 9.5% from the 2,043.94 close of 2015. The Nasdaq ended at 5,383.12, for a gain of just 7.5% from the 5,007.41 close at the end of 2015.

Johnson & Johnson

Johnson & Johnson generated roughly a 15% return after closing 2016 at $115.21. With a year-end consensus analyst price target of $125.16, an 8.6% implied upside along with a dividend yield of 2.8% would imply an expected total return of 11.4% for 2017, if the analysts are proven to be right.

Johnson & Johnson’s strong performance through 2016 has reflected the success of its new product launches and the strength of its overall core businesses, driven by strong growth in the pharmaceuticals business. With a number of regulatory approvals, several new drug application submissions and new breakthrough therapy designations from the FDA, this major pharma is increasingly confident in its pipeline expectation of filing 10 new pharmaceutical products between 2015 and 2019, each with revenue potential over $1 billion.

In a recent report, Janssen Biotech, a unit of Johnson & Johnson, announced that the FDA has approved Stelara for the treatment of moderately to severely active Crohn’s disease in adults. This is just one of the drugs coming out that will strengthen Johnson & Johnson’s pipeline.

This company is sort of like Old Faithful in that it just keeps spewing money into the air for investors each year. Perhaps there is something to be said for sticking with a mantra of being in health care products, pharmaceuticals and in consumer products at the same time. The company has a 54 consecutive years of dividend hikes and doesn’t look to be stopping anytime soon.

Johnson & Johnson shares have a 52-week trading range of $94.28 to $126.07, and the market cap is $315 billion. The dividend yield is 2.8%.

Merck

Merck shares rose 15% to close 2016 at $58.87. Its return might have been better had it not been for political commentary about drug pricing from Hillary Clinton ahead of the election, and then from Trump afterward. While Merck has not been singled out, it is among the largest pharma giants.

Merck’s consensus price target of $67.28 would imply 14.3% upside, but its 3.2% dividend yield would suggest a total return opportunity of 17.5%, if the analysts have their 2017 calls accurate.

While Merck carries a premium valuation, analysts believe the company has a strong pipeline of new drugs that could contribute meaningfully to revenue over the next five years. In particular, Argus believes that Merck has a strong product pipeline and that Keytruda (pembrolizumab) has substantial opportunities as a treatment for solid tumors, such as lung cancer, melanoma and head and neck cancer. Recently approved and forthcoming indications for Keytruda, along with growth from Zepatier and Gardasil, should contribute significantly to future sales growth.

Recent success at the European Society for Medical Oncology in mid-October helped propel Merck to its premium valuation. At that point, the company announced that Keytruda demonstrated superiority in overall survival at 18 months compared to standard of care chemotherapy (docetaxel) in patients with metastatic non-small cell lung cancer previously treated with platinum-containing chemotherapy.

Previously, Merck showed interest in buying Medivation, but Pfizer beat it to the punch. If the 2017 climate turns rough and Merck needs to add to its drugs portfolio, management would hope to act quicker when it comes to M&A, so as not to be left in the dust. Merck’s rival Pfizer also currently has a cheaper valuation that could be more attractive to some investors.

Merck has a 52-week range of $47.97 to $65.46 and a market cap of $163 billion. Its dividend yield is 3.1%, making it one of the 2017 Dogs of the Dow.

Pfizer

Pfizer managed to post a return of just 4.42% in 2016, and it closed out the year at $32.48. Pfizer’s consensus target price of $37.65 would leave an implied upside of 15.9%, but the 3.9% dividend yield would generate an implied total return opportunity of 19.8% in 2017, if the analysts got their numbers right.

Last year was a dud for Pfizer, despite sharp gains for rival Merck. The company had been torn in long-term efforts, like whether to move or acquire overseas, deciding if the restructuring would lead to a break-up, and deciding whether to sell some assets. Then there was the endless overhang of political pricing pressure on drug prices. What if Pfizer has become too cheap versus Merck, and could this help push the Dow to 22,000?

The company continued its acquisition plans when it announced another gigantic purchase, acquiring Medivation, a biotech focusing on oncology drugs for a stunning $14 billion. Medivation’s drug, Xtandi, already generates about $2 billion in yearly sales and has the potential to more than double, according to analysts. Pfizer said the deal would add five cents to earnings in the first full year after closing, and it isn’t expected to affect its 2016 financial guidance.

Top Wall Street analysts feel that the election of Trump will help companies like Pfizer repatriate some of the huge cash holdings they have overseas. With the tax rate on cash held offshore expected to be lowered, the value for this great company even goes higher.

Pfizer has a 52-week range of $28.25 to $37.39. The market cap is $197 billion and the dividend yield is 3.9%, making it one of the top Dogs of the Dow for 2017.

UnitedHealth generated a return of about 38% for shareholders in 2016, based on its $160.04 closing price on the last day of December. The consensus price target of $179.23 represents 12.0% upside in 2017, but the 1.5% dividend yield would take that implied total return up to 13.5%, if the analysts are correct when it comes to the largest health insurer in the United States.

Being a health insurer under Obamacare turned out to be fine for UnitedHealth. Now it has vacated most exchange operations and is focused on the group market and other value-added opportunities. These have been the main contributing factors to UnitedHealth’s success.

But the question remains how the health insurer will be treated when Obamacare gets dismantled. Political uncertainty in general can play a role in this stock’s performance as well. But keep in mind that even the lowest analyst price target of them all is barely $6 lower than the current share price, and this is after UnitedHealth shares already have had a massive run going into 2017.

The company has posted outstanding earnings over the past year, and it is one of the companies that limited exposure to the public exchanges. Top analysts also note that the Optum Care opportunity is underappreciated as the business can expand into more markets, and they note the value proposition is resonating with managed care organizations.

UnitedHealth has a 52-week range of $107.51 to $164.00 and a market cap of $153 billion. Its dividend yield is 1.5%.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.