The severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2 for short, has definitely made its presence felt on Wall Street during the opening weeks of 2020.
Despite a strong start to 2020, the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500 are all in negative territory for the year. What's more, these three major indices have each fallen by over 10% in the past 30 days.
But if history is any guide, this SARS-CoV-2 induced sell-off should turn out be one heck of a buying opportunity. Some of the biggest gains in history, after all, have been made by savvy investors who bought stocks when everyone else was selling. The financial crisis of 2008 drives this point home.
The brave souls that bought shares of high-quality companies like Apple (AAPL 0.17%) and Amazon (AMZN 0.25%) following the market's collapse on Sep. 29, 2008 have made out like bandits. Shares of Apple and Amazon have each generated total returns on capital of well over 2,000% in the intervening 11-plus years.
Now, the SARS-CoV-2 outbreak will certainly have a negative impact on corporate earnings this year, but there's almost no chance that this virus will evolve into the same kind of existential threat to capitalism that was the financial crisis of 2008. Therefore, long-term oriented investors probably shouldn't be afraid to go bargain hunting right now.
Where are the best opportunities in this volatile market?
One of the best ways to unearth market-beating investment opportunities is to dive into industries, sectors, and trends with potentially explosive growth rates. For example, rare disease companies, oncology companies, dividend-paying large cap pharma stocks, and cannabis-oriented companies are all expected to benefit enormously from a wave of tailwinds over the next 10 years.
Rare disease and cancer drugs sales are presently growing by double digits on an annual basis. What's key to understand is that this powerful growth trend should only gain momentum from this point forward, due to a steady stream of innovation, more accurate diagnostic tools, and the aging global population.
Dividend-paying large cap pharma stocks, on the other hand, have repeatedly proven to be some of the best investing vehicles in the market. Even companies that struggled with the patent cliff over the prior 20 years generally produced outstanding gains for investors, thanks to their rich shareholder rewards programs and rock solid free cash flows.
Lastly, the fledgling legal cannabis industry has admittedly gotten off to a rough start. But the industry's long-term value proposition remains very much intact. Over the current decade, for example, this nascent industry should morph into a nearly $200 billion a year market. The one big caveat, though, is that only a few names are likely to survive long enough to benefit from this rising tide phenomenon.
Here are 14 stocks, broken down by these aforementioned themes, that come across as ridiculously cheap right now.
4 Cancer stocks
Agenus Inc. (AGEN 1.95%), Arcus Biosciences, Inc. (RCUS 2.27%), Atreca, Inc. (BCEL 8.88%), and Bicycle Therapeutics plc (BCYC 1.65%) are four small-cap oncology companies that could all produce life-changing gains within the next two to three years.
Agenus is developing a broad array of monoclonal antibodies for various solid tumors. Right now, the company is gearing up to submit a regulatory filing for its cervical cancer combo consisting of balstilimab (AGEN2034) and zalifrelimab (AGEN1884). This combo therapy generated intriguing interim data last month, but was promptly greeted by a wave of selling from biotech investors.
The concern is that Agenus may not be able to carve out a profitable niche in this crowded therapeutic area, especially with new and potentially more potent cervical cancer treatments coming down the pike. The big picture issue, however, is that Agenus doesn't really need these therapies to be big winners commercially in order for them to be major value drivers in the near term. The company's market cap, after all, currently sits at a minuscule $335 million. A win on the regulatory front, therefore, should send this beaten down cancer stock soaring.
Arcus has been one of the few hot stocks in the entire market this year. Investors are excited about the prospects of the company's lead product candidate AB928, as well as the fact that it sports a rather robust oncology pipeline for a small-cap operation. Arcus' name has thus floated to the top of the buyout rumor mill in 2020. The company expects to roll out several clinical updates on AB928 by mid-year. If these data points are encouraging, this small-cap biotech should continue to swim against the current.
Atreca has also been able to shrug off this marketwide downturn, with its shares up by a stunning 60.6% in 2020. The big draw here is the company's novel immunotherapy platform, which uses a cancer patient's immune response to develop therapeutic monoclonal antibodies. Atreca has the blessing of elite investors such as the Baker Bros. and Bill and Melinda Gates. As the company's pipeline matures, there could be a lot of interest from top biopharmas in licensing deals or perhaps a buyout offer, making it a top cancer stock to consider buying right now.
Last but certainly not least, the U.K. based drugmaker Bicycle Therapeutics has been a rare winner in this volatile market. Bicycle's selling point is its cancer fighting platform that works by activating several types of tumor-killing immune cells. The company is in early stage development, but it is already attracting top flight biopharma partners. Longer term, Bicycle stands a good shot at fetching a rich tender offer.
4 Rare disease stocks
Rare disease stocks have pretty much gotten hammered across the board in 2020, whereby creating some outstanding buying opportunities for savvy investors. The core reason is that large cap biopharmas have shown a clear bias for cancer and gene therapies companies during the latest merger and acquisition bonanza. Rare disease drugmakers, in turn, haven't been able to rely on their attractiveness as a buyout candidate to ward off the ongoing onslaught of panic selling.
Amicus Therapeutics (FOLD 4.58%), Catalyst Pharmaceuticals (CPRX 2.02%), Crinetics Pharmaceuticals (CRNX 3.64%), and Sarepta Therapeutics (SRPT 2.76%) are all grossly undervalued orphan drug plays in the wake of this recent weakness.
Amicus presently sports one commercial-stage product with the Fabry disease treatment Galafold, but it could soon boast of a second product with a therapy known as AT-GAA indicated for Pompe disease. The headline here is that Amicus' top-line is set to grow exponentially over the next few years because of these two rare disease therapies. As an added bonus, Amicus has also built out an impressive line-up of gene therapies. Wall Street, in fact, believes this mid-cap drugmaker could more than double in value by 2021.
Catalyst Pharmaceuticals has edged out a modest gain this year, but its shares are still well off of their 52-week highs. The net result is that Catalyst's stock is trading at just 2.8 times 2020 projected sales. That's absurdly cheap for an orphan drugmaker.
The big knock against this company is its pricey Lambert-Eaton myasthenic syndrome medication Firdapse. The Food and Drug Administration (FDA) approved a rival therapy last year, presumably because of Firdapse's controversial price tag. So far, however, this would-be competitor has yet to gain much in the way of market share. As such, this putative competitive threat seems to be way overblown. So, once the reality of the situation sinks in, the market will more than likely change its tune toward Catalyst.
Crinetics Pharmaceuticals is a small-cap orphan drugmaker developing an orally administered therapy called paltusotine for acromegaly, which is a type of growth hormone disorder. The market hasn't been kind to this company since its IPO back in 2018, thanks to the fairly early stage nature of its pipeline. The long and short of it is that the market tends to ignore early stage drugmakers in general -- that is, unless a big pharma partner enters the picture.
However, the market's impatience should prove to be a great buying opportunity for long-term investors. The key reason is that paltusotine has blockbuster sales potential as a best-in-class treatment for acromegaly. It's going to take a few years for this drug to realize its commercial potential, but Crinetics Pharmaceuticals definitely sports a favorable risk-to-reward ratio as things stand now.
Sarepta Therapeutics has lost a bit of its shine over the past year. The core reason is that the company has consistently been one of the most expensive names within the orphan drug space due to its virtual monopoly for the muscle-wasting disorder Duchenne muscular dystrophy (DMD).
Sarepta's premium valuation, though, is arguably well-deserved. The bottom line is that Sarepta is close to extending its competitive moat through the development of gene therapies for both DMD as well as other rare diseases. Sarepta should therefore be able to continue posting outstanding sales growth for the foreseeable future. In fact, the company's shares may be trading at less than two times 2025 revenue right now. That's a speculative revenue forecast to be sure, but one that's certainly not out of the realm of possibility.
3 Large cap dividend-paying pharma stocks
Big pharma stocks that pay an above average dividend yield are always a good buy. Because these companies provide life-saving medicines, they tend to perform well regardless of the market's prevailing mood. With the pace of innovation ramping up in the space, however, this cohort of stocks could end up cooking with jet fuel in the latter half of the current decade. And AbbVie (ABBV -0.47%), Bristol-Myers Squibb (BMY 0.30%), and Pfizer (PFE 3.59%) are arguably the best trio of the bunch.
AbbVie offers a junk bond type yield of 5.21%, high single-digit top-line growth, and its shares are trading at less than nine times forward-looking earnings. Investors have shied away from this top biotech stock because of the patent headwinds swirling around Humira at the moment. But AbbVie has arguably done more than enough to put this narrative to bed. Eventually, the market should reward AbbVie for these efforts with a premium valuation. Meanwhile, investors can bank one of the most generous dividends in the entire healthcare sector.
Bristol-Myers Squibb comes with a modest dividend yield of 2.98%, one of the best oncology portfolios and pipelines, and a dirt cheap valuation at 9.43 times forward-looking earnings. The market has punished this big pharma stock of late due to the concerns about Opdivo's future. But Bristol's acquisition of Celgene has effectively nipped this particular risk factor in the bud. With several high-value oncology drugs set to make their debut in the next three years, after all, Bristol's top-line should pick up steam in a big way soon.
Pfizer's annualized dividend yield presently stands at 4.3%. The drugmaker's shares are also valued on the lower end of the spectrum for a big pharma, at 12.7 times forward-looking earnings. Nonetheless, Pfizer has been a big disappointment for investors in 2020. Ever since the drugmaker announced plans to carve out its generic drug business into a stand-alone unit, investors have kept their distance.
The underlying reason is that this move will significantly lower the company's free cash flows, which may negatively affect its shareholder rewards program. The more important issue to keep in mind, though, is that Pfizer will sport a far more compelling top-line outlook as a branded medicines company. It also has ample financial flexibility to bring in additional revenue-generating assets on an as-needed basis. In brief, Pfizer will be just fine in the long run.
3 Cannabis stocks
Cannabis has largely turned into a long-term play over the past year. For investors willing to buy and hold a select cadre of pot stocks for the next 10 years, however, the returns on capital could be quite exceptional. Aphria (APHA), OrganiGram Holdings (OGI -3.20%), and GW Pharmaceuticals (GWPH) are in many ways the most compelling long-term cannabis investing vehicles right now.
Aphria and OrganiGram Holdings offer investors a fairly similar overall value proposition. Both companies are trading at dirt cheap valuations, they each have better than average near-term growth prospects, and these two under-the-radar names may even outlast some of their far larger competitors. Aphria and OrganiGram, in short, have quickly morphed into dark horse candidates to become leaders in the legal cannabis space by the end of the decade.
GW Pharmaceuticals, by contrast, is intriguing because of its cannabis-derived epilepsy medication Epidiolex, along with the fact that its shares are trading at almost a three-year low following this marketwide downturn. GW Pharmaceuticals' stock, in fact, is now valued at a paltry 3.4 times next year's estimated sales.
Thanks to Epidiolex's strong sales growth and the company's low ball valuation, Wall Street believes that this medical cannabis stock can more than double over the next twelve months. That may sound like an overly optimistic outlook, but the company's core fundamentals support this rosy forecast.