This year (2020) is quickly going down in the record books as one investors will never forget. Following an 11-year bull market run, we watched as a new bear market instituted itself in less than four weeks, marking the steepest downtrend into bear market territory in history for all three major U.S. indexes.
We've also witnessed unprecedented measures designed to fight the spread of the coronavirus disease 2019 (COVID-19). With more than 716,000 confirmed cases worldwide as of midday on March 29, select U.S. states have joined other developed countries in shutting down nonessential activity to "flatten the curve" and ensure that their respective healthcare systems don't become overwhelmed. It's this slowdown in economic activity that has Wall Street on edge.
But the silver lining among all of this is that this, too, shall pass. Eventually every bear market and stock market correction in history have been completely erased by a bull market rally. There's no telling how long COVID-19 could be an issue, or how far the U.S. stock market could fall. But what we do know is that if you buy high-quality companies and hang on to them for lengthy periods of time, you have a very good chance of generating real wealth and outperforming all other investment vehicles.
With that being said, here are three top stocks to buy in the second quarter (Q2) that can make you richer.
During the coronavirus crash, I've been an outspoken proponent of investors buying into drug developers. Although COVID-19 does have the potential to disrupt drug-development activity in the very near term, the spread of this illness doesn't change the fact that patients who needed medicine last week or last month will still need it the following month. Since we don't get to choose when we get sick or what ailment(s) we develop, drug developers tends to generate predictable cash flow and possess healthy pricing power.
Among drug developers, I'm fancying biotech company Exelixis (EXEL 3.96%), which is a company I've owned for more than six years. Exelixis' workhorse is cancer drug Cabometyx, which is approved to treat first- and second-line renal cell carcinoma (RCC) and advanced hepatocellular carcinoma (HCC). Although RCC and HCC are competitive indications, Cabometyx is still the only second-line therapy in RCC to demonstrate the "trifecta" of a statistically significant improvement in objective response rate, progression-free survival, and median overall survival.
Investors will likely fancy Exelixis for its label-expansion opportunities. Even with notable share in RCC, Exelixis is working with the company's core competitor, Bristol Myers Squibb, to test how Cabometyx works in combination with an assortment of cancer immunotherapies. These combination studies (not solely with Bristol Myers) could expand Cabometyx's reach to prostate cancer, lung cancer, gastrointestinal cancers, head and neck cancers, sarcoma, and bladder cancer, in addition to RCC and HCC.
In other words, Exelixis is a cash cow, and it has the potential to generate north of $500 million in free cash flow every year from here on out. This cash, along with a near-doubling of sales expected between 2020 and 2023, should have investors excited.
Kirkland Lake Gold
Another way for investors to get rich during Q2 is to consider buying into high-quality gold mining stocks, such as Kirkland Lake Gold (KL).
There's probably never been a more perfect set of circumstances for the physical gold market. Global bond yields are plunging, the Federal Reserve has moved its federal funds rate back to an all-time low, and the nation's central bank also announced an unlimited quantitative easing program that'll see a lot of Treasury bonds and mortgage-backed securities purchased. Sprinkle in investor anxiety and a physical gold shortage, and you have a recipe for gold prices to soar. That bodes well for all gold mining companies.
One reason I've specifically singled out Kirkland Lake Gold is for its more than $700 million in cash and cash equivalents compared to virtually no debt. Having ample cash and working capital is especially important for mining companies at the moment given the possibility that mines could be shuttered in an effort to slow the spread of the coronavirus. Kirkland Lake has already halted all exploration activity, and has temporarily pared back operations at the Detour Lake mine in response to COVID-19. These slowdowns aren't worrisome given its healthy balance sheet.
There's also Kirkland Lake Gold's free cash flow generation, which is a function of the company's exceptionally low production costs. All-in sustaining costs per ounce sold came in at a mere $564 in 2019, with $463 million in free cash flow generated. This cash flow has allowed the company to repurchase more than 10 million shares of common stock and double its quarterly dividend. Having acquired the Detour mine in January, annual production should grow by another 50%, leading to even more robust cash flow generation.
In short, Kirkland Lake Gold can be a lustrous addition to your portfolio for years to come.
Investors looking to get rich are likely going to be enamored with Amazon's e-commerce division, which according to eMarketer last June was on track to account for 38% of all online commerce in 2019. This dominant market share, coupled with more than 150 million worldwide Prime members, ensures that users stay loyal to the Amazon ecosystem of products.
There's absolutely no doubt that Amazon's appeal has something to do with its retail operations. But retail is a relatively low-margin business which, in Amazon's case, is buoyed a bit by the Prime membership fees it collects. The real star here is the company's cloud service, Amazon Web Services (AWS).
Once viewed as an ancillary business, AWS has become a core segment for the company. AWS was responsible for 12.5% of total sales in 2019, up from just 11% of company sales in 2018. But it's not just that AWS is growing much faster than the e-commerce segment -- it's that cloud margins blow retail margins out of the water. Thus, as AWS becomes a larger percentage of total sales, the magnitude of the increase in cash flow for Amazon is many times greater.
While not a cheap stock in the traditional sense of the word, Amazon is inexpensive relative to its cash flow potential. And since Amazon is all about reinvesting most of its capital, cash flow makes for a far better measure of value than, say, price to earnings. Having been consistently valued at 23 to 37 times its cash flow throughout the 2010s, Amazon is currently valued at 9.5 times Wall Street's expected cash flow per share by 2023. That's a massive bargain for patient investors.