We recently compiled a list of the 10 Best Defensive Stocks To Buy Now. In this article, we are going to take a look at where Royalty Pharma plc (NASDAQ:RPRX) stands against the other defensive stocks.
Defensive stocks tend to remain stable and less affected by economic downturns. These companies operate in sectors that provide essential goods and services, which people need regardless of the economic climate. Defensive stocks mostly include stocks of companies among utilities, consumer staples, and healthcare sectors as they provide basic necessities of life. Companies in these sectors often show less volatility, and often provide steady dividends. They usually offer a safer investment choice during periods of market uncertainty.
US Stocks Surge But Experts Remain Cautious
U.S. stocks are having a great time, which is owed to strong economic data that has reassured investors. The S&P 500 and Nasdaq 100 have seen significant gains, as they are up 4.3% and over 6% over the last 5 days on August 15, respectively. The global markets have also recovered from recent losses, and the US broader market is back from the losses it faced in the first week of August. The investor sentiment remains strong and U.S. equities are seeing continuous inflows. Additionally, Fed officials are hinting at potential rate cuts which support optimism that the U.S. economy is on track for a soft landing.
However, some experts are still concerned about the future of the US economy and markets and hold a more conservative view. According to a July report by J.P Morgan, recent market trends have benefited large, high-quality companies, especially in tech and AI, which have resulted in high market concentration. However, maintaining this momentum in the second half of 2024 could be difficult due to high valuations and investor positioning. The report says that while U.S. market volatility is currently low, it could rise if conditions change.
According to Bruce Kasman, global growth is steady at 2.4%, with improved recoveries in Western Europe and emerging markets, along with a rebound in the manufacturing sector. Despite this, core global inflation is projected to remain around 3% in 2024, which could limit the potential for policy easing. Kasman warned that achieving inflation control and rate normalization might weaken demand and could interact with political factors to cause further inflation and central bank tightening.
Leon Cooperman’s Perspective on the Current Conditions
On August 15, Omega Advisors chairman and CEO, Leon Cooperman shared his perspective on the current economic outlook with CNBC Money Movers. Cooperman expressed a cautious outlook on the economy, which is driven by two main factors. First, he is alarmed by the rapid increase in the U.S. national debt, which has doubled from about $17 trillion in 2017 to approximately $34-35 trillion today. He said that this level of debt growth, which outpaces economic growth, is unsustainable and could lead to a fiscal crisis. However, the exact timing of such a crisis is uncertain. He further added that neither political party is addressing this looming issue.
Secondly, Cooperman compared today’s market conditions to past periods of financial excess, such as the Nifty 50 era in the 1970s, when companies with extremely high valuations eventually went bankrupt. He noted that during those times, the 10-year bond yield was 6.5%, much higher than the current rate of around 3.9%. He believes that if the current bond rate is appropriate, market valuations aren’t too high. However, he suspects that interest rates are too low and anticipates a rise in long-term rates, particularly the 10-year Treasury yield.
While he expects the Federal Reserve to cut short-term rates, which could ease borrowing costs, he believes long-term rates will increase, leading to a decline in bond prices and potentially putting downward pressure on stock valuations. If long-term rates rise significantly, it could make the stock market less attractive and could possibly result in a market decline.
Even though the current year has shown healthy markets with a couple of corrections, Leon Cooperman’s expectations from the markets cannot be ignored. Cooperman has a track record of being one of the most successful investors of the past several decades. If they hold out to be true, investors might look toward more defensive sectors of the market.
Our Methodology
For this article, we used stock screeners to identify over 50 large to mega-cap stocks from defensive sectors such as consumer staples, utilities, and healthcare. We narrowed our list to 10 stocks with positive analyst sentiment and the highest average analyst price target upside as of August 16.
A scientist in a laboratory looking through a microscope, surrounded by petri dishes and beakers while researching new biopharmaceutical advances.
Royalty Pharma plc (NASDAQ:RPRX)
Stock Price as of August 16: $27.20
Average Analyst Price Target Upside as of August 16: 58.24%
Royalty Pharma plc (NASDAQ:RPRX) functions as a purchaser of biopharmaceutical royalties and a funder for advancements in the biopharmaceutical sector within the U.S. The company focuses on acquiring and managing royalties and intellectual property that generate revenue in the biopharmaceutical field.
The company collaborates with biotech and pharmaceutical companies to provide the necessary funding for drug development. In return, the company shares in the revenue from the successful commercialization of these new drugs.
It holds royalties for more than 35 approved products, including well-known medications like Vertex Pharmaceuticals’ cystic fibrosis treatments and Imbruvica, a blood cancer drug distributed by AbbVie and Johnson & Johnson. Additionally, its portfolio includes royalties from 14 products still in development, targeting a range of therapeutic areas such as rare diseases, cancer, and neuroscience.
Royalty Pharma (NASDAQ:RPRX) has been covered by 9 analysts and 8 of them have given it a Buy rating. The average price target of $43.05 implies an upside of 58.24% to the stock’s current price, as of August 16. It tops our list of the best defensive stocks to buy now.
The company presents a possibly compelling investment opportunity as it uses its dominant position in the life sciences funding sector well. With a market share of approximately 60% since 2012, it is a leading player in financing life sciences innovations. Over the years, the company has significantly expanded its portfolio, growing from managing just three royalties in the 1990s to deploying over $20 billion in royalties today.
The company’s unique model involves funding drugs that are nearing full approval, which helps manage risks associated with early-stage investments. This approach has allowed Royalty Pharma (NASDAQ:RPRX) to build a strong portfolio centered around some of the most successful drugs in the healthcare industry.
For instance, in the second quarter of the fiscal year, it reported $608 million in portfolio receipts, marking a 12% increase from the previous year. This growth was primarily driven by strong sales in its cystic fibrosis portfolio, as well as revenue from GSK’s Trelegy, Tremfya, and Evrysdi.
Investors might find Royalty Pharma (NASDAQ:RPRX) attractive due to its consistent performance and shareholder-friendly practices. The company’s belief that its intrinsic value exceeds the current stock price led to a significant share buyback program as mentioned in its Q2 earnings call. In Q2 alone, the company repurchased $115 million worth of shares. This move reflects management’s confidence in their capital allocation strategy and their commitment to enhancing shareholder value.
Furthermore, it has already utilized $400 million of the $1 billion repurchase authorization approved by the board in early 2023. It is a proactive approach to returning capital to shareholders, which combined with its substantial market presence and successful royalty investments, solidifies Royalty Pharma’s (NASDAQ:RPRX) position in the industry.
Patient Capital Opportunity Equity Strategy stated the following regarding Royalty Pharma plc (NASDAQ:RPRX) in its Q2 2024 investor letter:
“While Royalty Pharma plc (NASDAQ:RPRX) is in the health care space, it is more like an investment firm that buys royalty assets in the healthcare space. The company has an extremely strong track record, running the business for over 20 years as a private fund before bringing it public. The market opportunity for external royalty funding has only grown as early-stage start-ups need funding and legacy players are looking to lower their debt levels. We think Royalty Pharma is perfectly positioned as the partner of choice. The company is disciplined, maintaining deal internal rate of returns (IRRs) in the low-teens despite the higher interest rate environment. We think as the company continues to deliver as a public company, the market will start paying attention.”
Overall RPRX ranks 1st on our list of the best defensive stocks to buy. While we acknowledge the potential of RPRX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RPRX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.