So which drug stocks now?

OK, so in this kind of environment what should you be looking for in a drug stock?

A Johnson & Johnson strategy at a less than a J&J price. Johnson & Johnson is expensive -- a PEG (price/earnings to growth) ratio of 2.15 on projected 2012 earnings per share -- for a reason. Its combination of industry-leading businesses in drugs, diagnostics, medical devices and consumer products gives the company amazingly predictable earnings growth. (It doesn't hurt that Johnson & Johnson is really good at what it does, with many of its units ranking No. 1 or No. 2 in their areas.) But that story is well known by investors, and in buying Johnson & Johnson, you pay not only for that stability but also for the company's reputation for stability. Investors are willing to take a lower return -- which means that they're willing to pay more -- because they know this story.

I think you can get an equivalent stability from the diversification at Roche (RHHBY). The company has a major and growing global franchise in cancer drugs and a solid diagnostics unit that is No. 1 in in vitro diagnostics. This New York-traded issue sells at a PEG ratio of 1.73. Even cheaper and more diversified -- at least until it splits into two companies in early 2013 -- is Abbott Laboratories. I'd hold shares through the split into AbbVie, a company that gets the current proprietary drug unit, and Abbott Laboratories, a company that gets everything else, because there's a very good chance that another drug company will make a bid for AbbVie. The PEG ratio on the combined company is 1.26. (The stock has been a member of my Jubak's Picks portfolio since September 2010.)

A big, fat, potentially profitable pipeline with lots of drug candidates that are relatively close to market.Novartis (NVS) fits this bill. The company announced recently that it has a target of 14 blockbuster drugs by 2017. (That's an increase from a 2011 forecast of seven blockbusters by 2017.) Among those blockbusters, the company believes, will be Afinitor for breast cancer. (The company increased its 2017 sales forecast for Afinitor to $2 billion from $1 billion.) The pipeline looks like more than enough to offset the erosion on Glivec, also a cancer treatment, which will lose patent protection in stages through 2023.

Novartis has one of the most cost-effective drug research operations in the industry. The company spends about $4 billion per new molecular entity versus the industry average of $5 billion. I think Sanofi's (SNY) pipeline is also impressive. Cancer drug Zaltrap and diabetes drug Lyxumia look to have blockbuster potential. Sanofi is managing the decline of Lovenox, a drug that helps prevent deep vein thrombosis and now faces generic competition in the United States.

Dominance in a big but concentrated market. This allows a drug company to leverage research spending on its existing knowledge base and to build up the kind of marketing unit that can get a new drug to market quickly and that can defend existing franchises. The drug company that best fits this description is Denmark's Novo Nordisk (NVO). I've written about this drug company, a leader in diabetes drugs and the world leader in insulin, frequently lately. The last time was just Tuesday, and my thinking hasn't changed much since then (see "5 below-the-radar-screen global stock market trends" at JubaksPicks.com).

You'll note that I haven't included current Jubak's Picks member Bristol Myers Squibb (BMY) in my list of five drug stocks I like. I will be selling those shares out of the portfolio and replacing them with shares of Novartis. Look for a write-up.

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

Click here to become a fan of MSN Money on Facebook

At the time of publication, Jim Jubak did not own or control shares of any company or fund mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any company or fund mentioned in this column. The fund did own shares of Novo Nordisk as of the end of September. Find a full list of the stocks in the fund as of the end of September on the Jubak Asset Management website.

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

Click here to find Jubak's most recent articles, blog posts and stock picks.

More from MoneyShow.com: