3 stocks we think could beat the market in the second half of 2022

Every investor wants alpha – the extra return above what a benchmark generates. Many stocks don’t produce alpha at all, but some do.

We asked three Motley Fool contributors to identify the stocks they think could beat the market in the second half. Here’s why they chose AbbVie (ABVV -4.17%), Astra Zeneca (AZN -0.73%)and Johnson & Johnson (JNJ 0.18%).

Get out of the bear market with this big drugmaker

Prosper Junior Bakiny (AbbVie): It’s been a good year for pharmaceutical giant AbbVie, at least so far. The company’s shares are performing much better than the S&P500. AbbVie benefits from the fact that life-saving medicines are in high demand even during tough economic times. Additionally, the pharmaceutical stock was arguably heavily discounted prior to its recent form.

Even after the strong year-to-date performance it has shown, AbbVie’s forward price-to-earnings (P/E) ratio is a modest 10.8 – which compares favorably to the P/ Futures E of 13.5 from the pharmaceutical industry and 16.95 from the S&P 500. Meanwhile, AbbVie’s business is strong. It continues to record strong revenue and profit growth. While it will lose patent exclusivity for its blockbuster rheumatoid arthritis drug Humira next year, sales of AbbVie’s new immunology products – Skyrizi and Rinvoq – continue to grow rapidly.

Then there’s the AbbVie dividend. The company is part of the Dividend Kings group with a streak of 50 consecutive years of rising dividends. AbbVie’s dividend yield of 3.74% is well above average. Dividend stocks can help smooth out market losses during a downturn. Of course, they can also be great sources of passive income.

Market-wide headwinds such as inflation and geopolitical tensions may get worse before they get better. But thanks to its strong lineup, juicy dividend and reasonable valuation, AbbVie can help investors weather these tough times. The pharmaceutical giant should be well positioned to outperform the broader market in the second half and beyond.

Lots of reasons to be optimistic

David Jagelsky (AstraZeneca): This year, investors have moved away from risky growth stocks and towards safer investments. That’s why I think AstraZeneca can beat the market in the second half, just as it has done so far in 2022.

One of the main reasons investors can stock up on the stock in the second half is that it’s a safe stock that pays a solid dividend yield of 2.2%. That’s better than the average S&P return of 1.7%. AstraZeneca is also modestly priced, with the stock trading at a forward price/earnings multiple of 15. That’s an attractive valuation given the company’s growth potential.

AstraZeneca has 183 projects in its pipeline. Among its most promising candidates is the breast cancer drug Enhertu, which has been shown to be effective in treating patients with both high and low levels of HER2 breast cancer. The drug is currently approved for the treatment of high levels of HER2 in certain conditions (for example, the cancer is metastatic or unresectable). AstraZeneca is seeking approval to expand its use to low levels as well. If that happens, it could add $2.5 billion to its potential, bringing peak annual revenue to $6.6 billion.

Another reason investors might look to AstraZeneca shares this year is its strong cash flow. Over the past two years, the company has generated just under $6 billion in free cash flow. With so much money coming in, the drugmaker is in a great position to invest in its operations and weather any headwinds that may arise. AstraZeneca could have momentum that will not only continue through the second half of 2022, but throughout the decade and beyond.

As sure as they come

Keith Speights (Johnson & Johnson): I think Johnson & Johnson is likely to outperform the market in the second half of 2022 for many of the same reasons my colleagues gave for AbbVie and AstraZeneca. Although J&J has achieved the level of gains for both stocks so far this year, it still easily beats the S&P 500.

My bullish view of Johnson & Johnson is based primarily on two factors. First, the United States is probably already in a recession or soon will be. Second, J&J’s impending spin-off to its consumer healthcare unit will be increasingly attractive to investors.

During recessions, safe-haven stocks generally perform better than most. Johnson & Johnson is about as safe as it gets. The company has been in business since 1886. It markets products that customers need. It’s a dividend king with 60 consecutive years of dividend increases. J&J is also very stable from a financial point of view.

The healthcare giant plans to spin off its consumer business next year. This will leave Johnson & Johnson with two segments: pharmaceuticals and medtech. Both have stronger growth prospects than the consumer unit.

Jessica Moore, J&J’s vice president of investor relations, noted on the company’s second-quarter conference call that the company is “confident” its pharmaceuticals segment can deliver above-market adjusted operating sales growth for the 11th consecutive year in 2022. Its medtech segment should also have easier year-over-year comparisons in Q3 and Q4.

I suspect that investors will pay much more attention to the relative strengths of these two companies as we get closer to the impact on consumer health. The more emphasis is placed on the positives of J&J, the more likely the stock will beat the market.