A Prescription for Election Fever

 | Oct 18, 2012 | 10:58 AM EDT
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If the elections are giving you a tummy ache, heartburn or other malady, perhaps you need some pharmaceuticals. I am referring to pharmaceutical stocks, several of which are good investment opportunities at the moment.

The way I choose stocks is by relying on strategies I created by computer modeling the strategies of some of Wall Street's greatest investors. These are investors who have written books about how they invest or have had biographers write about their strategies. These strategies are essentially how hugely successful strategists work the market and two of these strategies think now is the time to pop the pharmaceutical pill and buy.

The strategy I base on the writing of James P. O'Shaughnessy is very much in favor of GlaxoSmithKline (GSK). One of the world's largest pharmaceutical companies, this British-based behemoth produces drugs, vaccines and consumer healthcare products and operates globally. The O'Shaughnessy strategy likes the company's large market cap ($114 billion), strong positive cash flow per share ($4.75), large number of shares outstanding (2.5 billion) and huge trailing 12-month sales ($44 billion). The strategy then selects among all the companies that have passed these four hurdles and chooses the top 50 based on their dividend yield. Glaxo's yield of 4.89% places it in this group.

Another member of Big Pharma is Novartis (NVS), headquartered in Switzerland. It develops, manufactures and markets a variety of healthcare products, including brandname pharmaceuticals, generics, eye care products, vaccines and consumer health products. Like Glaxo, Novartis gets the nod from my O'Shaughnessy-based strategy. In Novartis' favor, market cap of $170 billion, cash flow per share of $5.31, 2.4 billion shares outstanding and trailing 12-months sales of $58 billion. With a dividend yield of 3.93%, it earns a spot among the O'Shaughnessy top 50.

Glaxo and Novartis are among pharma's elite, but this next company is likely one you are not familiar with, even though Morningstar reports it holds a 70% share in its market. The company is Perrigo (PRGO), headquartered in Michigan. It calls itself "the world's largest manufacturer of OTC pharmaceutical products for the store brand market." If you go to a discount store, supermarket, drug store or other retailer and you see a name brand item on the shelf and next to it an equivalent product with the retailer's name, there's a good chance Perrigo made that store brand product. It also makes generic prescription drugs, nutritional products and dietary supplements, among other products. Morningstar says Wal-Mart (WMT) accounts for about 20% of the company's revenue.

I have a strategy based on the writings of Peter Lynch and it likes Perrigo. The most important variable used by this strategy is the P/E/G ratio, which is price-to-earnings relative to growth and is a means of gauging how much the investor is paying for growth. A P/E/G of 1.0 or less is acceptable and Perrigo comes in well below this ceiling with a P/E/G of 0.77, based on the average of the three-, four- and five-year historical EPS growth rates. In addition, the company is going a fine job managing its inventories.

These are solid, well-positioned companies with enviable track records. However you feel this election season, these drug companies have the power to make you feel all warm and fuzzy about your investments.

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