In this aging bull market, you might not think there are many value stocks still trading at sizable discounts relative to their long-term fundamentals. However, there are a few well-known names with extremely attractive valuations bumping around in this heated market -- that is, when viewed from the perspective of a long-term-oriented investor.
Top healthcare stocks CVS Health Corporation (NYSE:CVS) and Celgene Corporation (NASDAQ:CELG), for example, come across as downright bargains for a variety of reasons right now. Read on the find out more.
An overblown risk factor
Shares of CVS Health have been in a downward spiral for about a year now thanks to the potential entry of Amazon into the pharmacy business. Why has this competitive threat spooked investors so badly? The primary concern is that Amazon will be able to leverage its access to big data and vast online retail network to essentially crush CVS's all-important pharmacy services segment. If this scenario turned into reality, CVS would indeed be in deep trouble. The company's pharmacy services segment, after all, generated a whopping $32.2 billion in revenue during the first quarter of this year.
But this fear is almost certainly overblown. CVS has an entrenched competitive position that won't be easily overcome by any would-be competitor -- even if they are the 800-pound gorilla that is Amazon. Additionally, CVS has taken definitive steps to thwart new competitive threats.
Earlier this month, for example, the company announced a massive expansion of its prescription drug delivery service throughout the United States. Patients can now order their prescriptions through a mobile app, or by calling the closest store, and have them delivered to their doorstep the same day. That kind of user-friendly drug delivery service is going to be hard to beat for any competitor, regardless of their latent technological advantages.
So, why is CVS stock cheap right now? Investors have sold off CVS' stock to the point where it now sports a ridiculous price to sales ratio of 0.39, and a forward price to earnings ratio of only 9.82. No matter how you slice it, that's downright dirt-cheap for a cash-flow-positive healthcare stock that's set to grow its top line by a respectable 4.1% next year. Lastly, CVS appears more than capable of maintaining the bulk of its market share in the pharmacy services business due to its innovative approach to drug delivery.
Celgene's bad year isn't a new normal
Over the course of 2013 to 2017, shares of the biotech giant Celgene nearly quadrupled in value. The main reason is that the company's multiple myeloma drug franchise -- which is spearheaded by mega-blockbuster Revlimid -- kept blasting higher in terms of sales volume.
Even though Revlimid's sales are still projected to come in at a jaw-dropping $9.5 billion this year, investors have grown deeply concerned about four key issues regarding Celgene's core growth engine. As a result, the biotech's shares have shed almost a quarter of their value this year, and they continue to have trouble finding a bottom in recent trading sessions.
The four inter-related issues weighing on Celgene's shares right now are the following:
- Revlimid is set to start facing generic competition by as early as 2022.
- Celgene has the greatest dependence on a single drug (Revlimid) for growth in the industry, according to a report by EvaluateGroup.
- Celgene also reportedly has the highest pipeline risk in biotech due to its documented need to diversify ahead of generic Revlimid entering the market.
- The biotech's botched regulatory application for anti-inflammatory drug ozanimod stoked concerns about Celgene's ability to properly integrate all of its recent acquisitions. Celgene acquired ozanimod as part of its 2015 buyout of Receptos.
While these headwinds are indeed serious, Celgene's stock is arguably being irrationally punished by the market right now. The deeper truth is that Celgene's broad pipeline has enough firepower to not only overcome these particular headwinds, but to continue to keep the company growing at industry-leading levels for years to come. In the next few years, for instance, the biotech expects to launch upwards of ten potential blockbusters, such as the highly anticipated multiple myeloma therapy bb2121, as well as ozanimod.
In sum, Celgene has had its fair share of setbacks of late that have acted to amplify investors' worries about Revlimid's future. But this top biotech's robust clinical pipeline -- which is home to some truly innovative new medicines -- also shouldn't be so easily dismissed by investors. Eventually, the market will almost certainly realize this mistake, and Celgene's shares will rebound in kind.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. George Budwell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Celgene. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.