BOSTON ( TheStreet) -- Health care is the stock market's cheapest sector, based on earnings projections. The average S&P 500 health-care stock sells for a forward price-to-earnings ratio of less than 12. Here's a look at seven undervalued health-care stocks selling at even bigger discounts. A rotation from risk into quality will benefit these investments in 2011 and beyond. Researcher JPMorgan recommends overweighting each of these equities.

Below, the stocks are ordered by forward P/E.

7. Amgen ( AMGN) is a seasoned biotechnology company, with a market value of $51 billion.

Since 2008, it has grown net income and earnings per share 13% and 20%, annually, on average. Amgen's adjusted fourth-quarter earnings inched up 1% to $1.17, beating analysts' consensus estimate by 5.9%. Its sales rose 1%, as well, past $3.8 billion, matching the consensus forecast. Amgen is exceptionally cheap, trading at a trailing P/E of 11, a forward P/E of 9.7 and a book value multiple of 2.1, 40%, 54% and 67% discounts to biotechnology industry averages.

JPMorgan, ranking the stock "overweight", was impressed by management's 2011 guidance and expects it to be in a beat-and-raise environment in 2011 as there are notably low expectations for the company's legacy products and solid growth prospects for the company's denosumab antibody franchise. Amgen recently announced plans to purchase OncoVex, which has a drug for head and neck melanoma in stage three of FDA approval. JPMorgan's $65 target suggests 19% upside. Currently, 70% of analysts rate Amgen "buy."

Bullish Scenario: Piper Jaffray rates Amgen "overweight", expecting an advance to $73.

Bearish Scenario: Goldman Sachs ranks Amgen "sell", forecasting a fall of 8% to $50.

6. Abbott Laboratories ( ABT) makes pharmaceuticals and diagnostic products.

Since 2008, Abbott has grown sales 11% annually, on average. Its fourth-quarter adjusted earnings increased 10% to $1.30, narrowly outperforming the consensus estimate. Its sales climbed 13% to nearly $10 billion, again, a narrow beat. Abbott's stock sells for a trailing P/E of 15, a forward P/E of 9.2 and a sales multiple of 2, 40%, 21% and 41% discounts to pharma peer averages. It yields 3.9%. The dividend has grown 11% and 9.9% annually, on average, over a three- and five-year span, respectively.

JPMorgan expects 2011 to be a year of execution as the company integrates Solvay, Sydus and Piramal into its established products division. It is optimistic that emerging market expansion will offset "pressure on mature businesses." Although the quarterly results were in-line with the bank's forecast, it cut its target to $55 in reaction due to "incremental pricing pressure, the Similac recall and challenges from a slower global economy." It expects the gross and operating margins to improve modestly in 2011. Currently, 61% of researchers following Abbott rank it "buy."

Bullish Scenario: UBS rates Abbott "buy" and predicts that its stock will increase 41% to $64.

Bearish Scenario: Citigroup ranks Abbott "sell", expecting its stock price to fall 3% to $44.

5. Gilead Sciences ( GILD) develops drugs to combat life-threatening diseases.

Gilead's adjusted quarterly earnings contracted 1.1% to 95 cents, barely beating analysts' consensus target. Its sales, down 1.7%, matched expectations at $2 billion. Gilead's operating margin tightened from 53% to 49%. Its stock has fallen 17% in 12 months, underperforming indices. It trades at a trailing earnings multiple of 12, a forward earnings multiple of 8.5 and a book value multiple of 5, 39%, 60% and 22% biotechnology industry discounts.

Of analysts following Gilead, 21, or 63%, advise purchasing its shares, 11 recommend holding and two advocate selling them. JPMorgan, ranking Gilead "overweight", views its 2011 guidance as conservative, predicting numerous accretive expansion opportunities in the HIV franchise and share buybacks to support the stock in 2011. The HIV and HCV (hepatitis c) pipeline is robust and valuation is compelling, in JPMorgan's view. The bank calls Gilead its "top pick in large-cap biotech" and forecasts an advance of 18% to $45.

Bullish Scenario: Credit Suisse rates Gilead "outperform", forecasting it will climb 25% to $48.

Bearish Scenario: Goldman Sachs ranks Gilead "neutral", expecting it to decline to $38.

4. Merck ( MRK) is a pharmaceutical company.

Its fourth-quarter adjusted earnings stretched 11% to 88 cents, outperforming the consensus target by 5.8%. Merck's sales expanded 20% to $12 billion, a 5% upside surprise. Since 2008, revenue has increased 24% annually, on average, helped by acquisitions. The quarterly gross margin dropped from 91% to 74%, but the operating margin rose from 23% to 28%. Merck's stock sells for a forward earnings multiple of 8.4 and a sales multiple of 2.2, 28% and 35% pharmaceutical industry discounts.

Merck's stock has fallen 9.1% in 12 months, lagging behind indices. It yields 4.6%, but the dividend hasn't grown since 2004. Merck withdrew its long-term earnings growth rate following quarterly results, dismaying some analysts. This suggests a markedly different strategy than that of Pfizer ( PFE), a comparably-sized rival that is focused on margin expansion through research cost-cuts. Merck seems more interested in research and development investment and drug-portfolio enhancement. JPMorgan expects the stock to rise 28% to $42.

Bullish Scenario: Credit Suisse rates Merck "outperform", predicting a rise of 34% to $44.

Bearish Scenario: Citigroup ranks Merck "hold", forecasting that it will ascend to $34.

3. Pfizer ( PFE) is the world's largest pharmaceutical company, with a $152 billion market capitalization.

A consensus value pick, Pfizer has risen 7% in 12 months, trailing U.S. indices. Its fourth-quarter adjusted earnings declined 4% to 47 cents, beating consensus by 2.4%. Sales climbed 6.2% to nearly $18 billion, outperforming analysts' target by 3.9%. Pfizer's gross margin fell from 81% to 59% and its operating margin contracted from 21% to 20%. Its stock sells for a forward P/E of 8.4 and a sales multiple of 2.3, 28% and 34% pharmaceutical industry discounts.

Pfizer pays a quarterly dividend of 20 cents, converting to an annual yield of 4.2%. The dividend has fallen from a high of 32 cents, last paid in 2009. JPMorgan is notably bullish on Pfizer, not only ranking it "outperform", but also offering the highest price target on Wall Street, at $25, consistent with a 32% one-year gain, excluding dividends. The bank is encouraged by the company's recent cost-cuts, as research and development productivity has been far too low. Furthermore, with numerous drugs in stage three of approval, upside catalysts are abundant.

Bullish Scenario: JPMorgan rates Pfizer "outperform", expecting an advance of 32% to $25.

Bearish Scenario: Citigroup ranks Pfizer "hold", but forecasts that its stock will rise to $20.

2. Cigna ( CI) is a managed health-care company with U.S. and international operations.

Since 2008, it has grown sales, net income and earnings per share 6.4%, 6.5% and 8% annually, on average. Cigna's stock has rallied 30% in the past 12 months. Fourth-quarter adjusted earnings surged 85% to $1.15, beating the consensus target by 13%. Cigna's adjusted sales grew 17% to $5.4 billion, exceeding consensus by 1.4%. Cigna's stock sells for a trailing P/E of 8.7, a forward P/E of 8.3 and a sales multiple of 0.6, 47%, 46% and 24% industry discounts.

Of researchers following Cigna, just 41% advise purchasing its stock. JPMorgan, pleased with the quarterly earnings beat, is optimistic about upside as operating performance met its expectations. The bank and other researchers are modeling a share repurchase into their forecasts, setting up a potential downside catalyst. Still, enrollment fell less than anticipated during the quarter and a rebound in employment would benefit the company. JPMorgan feels that a "pull forward/spend of operating expenses" is understating the earnings run rate.

Bullish Scenario: Deutsche Bank rates Cigna "buy", predicting a rise of 19% to $51.

Bearish Scenario: Citigroup rates Cigna "hold", forecasting that it will decline to $42.

1. Cephalon ( CEPH) is a biopharmaceutical company, designing therapies for the central nervous system, inflammatory diseases, pain and oncology.

Its net income has grown 56% a year, on average, since 2008. Cephalon's stock has fallen 8% in the past 12 months. It sells for a trailing P/E of 11, a forward P/E of 7.5, a book value multiple of 1.7, a sales multiple of 1.8 and a cash flow multiple of 5.6, 40%, 65%, 73% and 84% discounts to biotech peer averages. Its PEG ratio, a measure of value relative to growth, of 0.1 signals a 90% discount to fair value.

In the near term, JPMorgan expects "the Cephalon story to be focused on Nuvigil trends." Nuvigil is Cephalon's drug used to treat narcolepsy, shift work disorder and obstructive sleep apnea. Nuvigil is pending approval for treatment of bipolar disorder in the second-half of 2011. Also, the pipeline potential of Lupuzor and Cinquil could offer material upside catalysts as the year progresses. JPMorgan rates Cephalon "overweight", expecting an advance of 22% to $73. Of researchers covering Cephalon, 55% rank its stock "buy" and 45% rank it "hold."

Bullish Scenario: Stifel Financial rates Cephalon "buy", predicting a rise of 40% to $84.

Bearish Scenario: Deutsche Bank rates Cephalon "hold", forecasting it will rise to $65.

-- Written by Jake Lynch in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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