The past two months have been a wake-up call to investors that the stock market doesn't go straight up. Even though the market has historically gained 7% a year, inclusive of dividend reinvestment and when adjusted for inflation, it doesn't mean there aren't rough patches from time to time.
Since 1987, there have been 23 instances where the broad-based S&P 500 has dipped by at least 5%, according to Yardeni Research, and since 1950, the S&P 500 has witnessed 36 corrections, which are defined as a decline of 10% or more from a recent high. In February, the Dow Jones Industrial Average and S&P 500 both fell into correction territory for the first time in two years, with losses of just over 10% since hitting an all-time high in January.
But the good news is that each and every one of these corrections (save for the current one) has eventually been erased by bull market rallies. Patient long-term investors are almost always rewarded, which means any correction is usually a great time to go shopping for new stocks. Though I haven't added any new positions to my portfolio recently, I do have four companies high on my watchlist that could soon find themselves squarely in my portfolio should this correction persist.
If I had to pick my top watchlist stock, it would be biotech blue-chip Celgene (CELG). Celgene's stock has been hammered since it lowered its 2020 outlook in October, and more recently after the company announced embarrassing insufficiencies with its new drug application for ozanimod, an experimental next-generation multiple sclerosis drug that's being counted on by the company and shareholders to generate billions in annual sales. The need for this additional information for its filing will delay ozanimod's projected launch date. Lastly, sales growth of anti-inflammatory pill Otezla have been underwhelming in recent quarters.
That's the bad news; now here's the good news. First, Celgene announced a settlement with generic Revlimid manufacturers in December 2015 that'll keep a flood of generic Revlimid off pharmacy shelves until the end of January 2026. That means Revlimid will remain a cash cow for Celgene, and with its increasing demand and duration of use, it has a real shot of one day becoming the best-selling drug in the world, based on annual sales.
Secondly, ozanimod, Otezla, Pomalyst, and Abraxane all have sustainable blockbuster potential and the ability to expand their label indications, along with Revlimid. The company's recently announced acquisition of Juno Therapeutics will also bolster its cancer pipeline by adding unique CAR-T therapies to the mix. Sales growth is far less of a concern than investors realize.
And finally, look at the valuation. Celgene is valued at roughly 7.3 times its projected 2020 earnings per share, despite an expected revenue growth rate of roughly 15% per year. That's dirt cheap, and it certainly has my full attention.
Another down-on-its-luck stock of late that's rising through the ranks of my personal watchlist is social media kingpin Facebook (META -0.33%). Shares have nosedived in recent days following news that Cambridge Analytica mined data from up to 50 million Facebook users and employed that information to help the Trump campaign better target ads at users in 2016. It's yet another in a series of PR scandals that seem to rock the social media landscape with some frequency.
But here's the thing about issues like this: They're easily forgotten. This isn't to say that a small handful of Facebook users won't leave the platform, or that users won't tighten up their security settings in an attempt to prevent data-mining firms from using their preferences as a means to target advertisements at them in the future. However, it does mean that this will likely blow over in relatively quick fashion and lead to few, if any, long-term sales and profit repercussions for Facebook.
The reality here is that Facebook has just touched the tip of the iceberg with regard to mining its social platforms for profitable avenues. Its introduction of ads to Messenger, along with its big ad push with Instagram beginning in 2015, is just a taste of what Facebook can do to boost sales. It hasn't even really begun to monetize Messenger or WhatsApp as of yet, despite the fact that it has ownership of four of the seven most popular social media sites. It also has deep-enough pockets to spend big on video, which remains a means to build regular viewership and compete directly with YouTube.
What's notable is that Facebook is cheaper now than it's just about ever been. At less than 16 times 2020 earnings per share and a sales growth rate that could average between 15% and 30% per year through 2021, any sizable dip in the stock from here could be a buying opportunity.
Next, I've really got my eyes on Whirlpool (WHR 1.15%). That's right, boring old appliance giant Whirlpool, which has been struggling in recent months as a result of a slightly weaker-than-expected profit outlook for 2018, weaker sales in Asia and its prime North American market in 2017, and rising interest rates domestically. Let's not forget that brand-name appliances aren't necessarily cheap, meaning it's becoming more expensive for consumers to finance these purchases.
Yet there are a number of reasons to be excited about Whirlpool over the long run. Namely, it does a really good job of creating shareholder value and rewarding long-term investors. It repurchased a record $1.1 billion worth of common stock in 2017, and plans to continue buying back its own stock in 2018. Management also made cost-cutting initiatives a priority this year, which should boost margins while sales flatten out in the interim. And we can't forget that Whirlpool pays a respectable $4.40 a year in dividends, which works out to a market-topping 2.8% yield.
Whirlpool also has its international expansion working in its favor. This is a numbers games for the company, and historically the global economy is growing far more often than it's contracting, which bodes well for the long run. The company's push into Asia, as well as economic stabilization throughout much of Europe, should help diversify its revenue stream in the years to come.
Like the companies mentioned above, Whirlpool happens to be very attractive from a fundamental perspective. By 2020, it's expected to generate $19.59 in EPS, placing it at just eight times EPS based on its current price. Buy, rinse, repeat. That's a recipe for success when it comes to Whirlpool.
4. Alliance Resource Partners
Last but not least, coal producer Alliance Resource Partners (ARLP -2.80%) is looking mighty intriguing. And, yes, I did just say "coal producer." There probably hasn't been a more depressing industry in recent years than that of coal production, which has suffered from falling prices as a result of oversupply, growing access to alternative energy sources like natural gas, wind, and solar, and high levels of debt. But these aren't major concerns for Alliance Resource Partners.
You see, Alliance Resource Partners is a conservatively run limited partnership. It ended its most recent quarter with $574 million in total debt and a debt to equity of 50%, which is substantially lower than its peers'. In fact, over the trailing-12-month period, the company has generated $556 million in operating cash flow, so its debt levels aren't a big concern. It even has the flexibility to make acquisitions if the price is right, based on the current health of its balance sheet.
What also makes Alliance Resource different is its focus on securing production commitments well in advance. As of the company's full-year 2017 report, released in late January, it forecast 39.5 million to 40.5 million metric tons of sales volume for 2018. However, it has 33.7 million metric tons in secured price and volume commitments already for 2018, as well as 11.6 million tons in 2019, 7.6 million tons in 2020, and 1.3 million tons in 2021. Thinking ahead means less exposure to the wholesale market and much better cash flow predictability.
With coal still expected to produce north of 30% of this country's electricity, Alliance Resource and its sustainable 11% dividend yield look like a genuine opportunity for contrarian investors. And, if that's not enticing enough, it's currently valued at less than six times this year's estimated cash flow per share. That's cheap.