Please ensure Javascript is enabled for purposes of website accessibility

Here's My Single Best Investment Idea for July

By Sean Williams – Jul 2, 2020 at 4:51AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Turnaround stories really do exist on Wall Street.

Congratulations, folks! We've finally reached the halfway point of 2020. Sure, it might have felt like it's taken five years to get here, but history suggests there will be brighter days ahead.

Thus far in 2020, we've witnessed the fastest bear-market decline in history, a record-breaking volatility reading, courtesy of the CBOE Volatility Index, and one of the most ferocious rebound rallies from a bear-market low. If this incredible volatility has taught investors anything, it's the importance of trusting in your investment thesis over the long run.

A person looking at a choppy, but rising, stock chart on a tablet.

Image source: Getty Images.

As we begin our descent toward the latter half of 2020, I'd like to introduce you to my single best investment idea for the month of July: brand-name and generic-drug developer Teva Pharmaceutical Industries (TEVA 2.84%).

Take a quick peek at Teva's five-year chart, and most investors would probably make a beeline for the exit. On a trailing-five-year basis, Teva has lost 78% of its value, equating to a more than 120-point underperformance relative to the benchmark S&P 500 over the same time frame. But as you're about to see, turnaround stories really do exist on Wall Street.

Teva's fall from grace

However, before diving into the numerous reasons behind my long-term optimism for Teva Pharmaceutical, let's first go over some of the catalysts that sank this stock.

One of the biggest issues plaguing Teva has been a loss of confidence in management. Back in 2016, the company settled with the U.S. government to the tune of $519 million over bribery charges in a handful of overseas countries. More recently, Teva is one of a number of drugmakers that's been named as a potential perpetrator of the opioid crisis.

Another pretty big problem for Teva was the company's acquisition of generics drugmaker Actavis from Allergan. Point blank, Teva grossly overpaid for the deal that made it the largest generic drugmaker in the world. As a result, its debt swelled past $35 billion by the end of 2016, giving the company very little financial flexibility. When its issues began to mount, Teva was forced to completely abandon what had once been a sizable dividend payout.

A generic drug tablet with a dollar sign stamped into it.

Image source: Getty Images.

A third concern for Teva, which had been looming for a while, was the expected loss of patent exclusivity on top-selling brand-name drug Copaxone. At its height, multiple sclerosis drug Copaxone generated around $4 billion a year for Teva. But since the introduction of generic competitors, Copaxone has seen its sales dip to what'll likely amount to $800 million in 2020. Replacing more than $3 billion in lost revenue doesn't happen overnight.

There's simply no debating that Teva has had its fair share of issues and then some. Now, let's take a closer look at all the reasons buying Teva actually makes a lot of sense.

Here's why now is the time to buy Teva Pharmaceutical

Though there are quite a few reasons to be bullish on Teva, none stands out more than CEO Kare Schultz. Following Teva's multiple issues in 2016 and 2017, the company turned to Kare Schultz, a turnaround specialist, as its new CEO. Since taking the helm, Schultz has helped Teva to unload noncore assets to reduce the company's debt load. He's also overseen an approximate $3 billion reduction in annual operating expenses. This has allowed Teva to reduce its net debt from $34.2 billion to $24.3 billion in less than three years. With much better financial flexibility, it's no wonder the company recently extended Schultz's tenure through at least late 2023.

Teva is also a logical beneficiary from an aging global population. The expectation is that an aging population with increased access to medical care will demand more maintenance therapies over time. That's good news for generic drugmakers that are counting on volume to drive their growth.

But it's not just volume that's on Teva's side. Additionally, the price for brand-name therapies continues to soar, and, as noted above, exclusivity for brand-name drugs is finite. This puts the focus on generics playing an even larger role in the health and well-being of patients in the future.

A lab researcher holding up and examining a prescription capsule.

Image source: Getty Images.

Beyond generics, Teva has a number of relatively new brand-name therapies that are just beginning to ramp up and should help to push revenue growth in the right direction. Austedo, which is used to treat tardive dyskinesia and Huntington's disease, delivered $122 million in first-quarter sales, which was up 64% from the prior-year period. Meanwhile, migraine-prevention medication Ajovy saw sales rise 44% in Q1 2020 to $29 million. It's a bit of a slower start for Ajovy than expected following its September 2018 launch, but the release of a brand-new auto-injector device in April 2020 should help sales really pick up.

This is also a story about value. While Teva still has work to do in regard to reducing its debt levels, the company is fully capable of generating in excess of $2 billion in operating cash flow each year, which should allow it to continue chipping away at its remaining debt. Currently, shares of Teva can be had for 1% below its book value and less than 5 times next year's forecast earnings per share. Again, with its financial situation greatly improved, a sub-5 forward price-to-earnings ratio is almost unheard of for a pharmaceutical stock.

Finally, don't overlook the growing likelihood that Teva's improved financial situation will allow the company to refinance some of its existing debt to a considerably more attractive interest rate.

Though Teva remains a work in progress, the combination of Kare Schultz, the company's newer brand-name therapies, and stronger generic demand has made sure that the arrow is most definitely pointing higher.

Sean Williams owns shares of Teva Pharmaceutical Industries. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Teva Pharmaceutical Industries Limited Stock Quote
Teva Pharmaceutical Industries Limited
TEVA
$7.96 (2.84%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.