For more than a decade, growth stocks have ruled the roost on Wall Street. But 2021 could bring a changing of the guard.
During the first quarter, the predominantly value-stock-packed Dow Jones Industrial Average led both the broad-based S&P 500 and tech-heavy Nasdaq Composite to the upside. Furthermore, history has shown that value stocks tend to perform their best during the early stages of an economic recovery, which is where we're at now. With valuations stretched to historic levels, it would not be a surprise to see value stocks outperforming the broader market.
The $64,000 question is: Which value stocks to buy?
For investors with a long-term mindset who appreciate well-run businesses, the following three value stocks all have the potential to make you a lot richer in the second quarter, and well beyond.
If you're scratching your head and wondering why social media giant Facebook (META 2.48%) has been placed on a list of value stocks, I've got a surprise for you: Facebook is both a growth and value stock. It is growing sales by 20% to 25% annually, yet has a price-to-earnings-growth ratio (PEG ratio) of just above 1. The former implies it's a growth stock, while the latter suggests it's undervalued.
Investors only need to take a closer look at Facebook's monthly active user data to see what sort of dominant company they're dealing with. During the fourth quarter of 2020, 2.8 billion people visited Facebook on a monthly basis. An additional 500 million unique individuals visited either Instagram or WhatsApp, which Facebook also owns. That's over 42% of the world's population heading to a Facebook-owned social platform at least once a month. The breadth of this audience is an advertiser's dream come true. It's why Facebook was able to increase ad revenue by 21% last year, despite the worst economic downturn in decades.
The crazy thing about the more than $84 billion in ad revenue Facebook generated last year is that nearly all of this came from monetizing its namesake site and Instagram. Neither WhatsApp nor Facebook Messenger, two top-five social platform destinations, have been meaningfully monetized yet.
Facebook also has plenty of opportunity to diversify its revenue stream beyond advertising. For instance, the company could lean on Facebook Pay to expand online or digital payments. It could also use its company's namesake platform to promote some form of paid streaming content. The Oculus line of virtual reality devices holds promise, too.
Despite being one of the largest publicly traded companies by market cap, Facebook still looks to be in the earlier innings of its growth cycle. That's great news for long-term-minded value investors.
If more-traditional value stocks are your thing, check out gold stocks. For the past half-decade, mining companies have been paying down debt and focusing their efforts on expanding output at their lowest-cost mines. The result is an industry filled with single-digit price-to-earnings ratios and historically low price-to-cash-flow multiples. That's why SSR Mining (SSRM -0.93%) can be safely bought and held in the second quarter and beyond.
Although the thesis for owning gold isn't as perfect as it was in, say, August, the outlook for the precious metal remains bright. The Federal Reserve's monthly bond-buying program is designed to lower long-term yields, and the U.S. money supply continues to tick higher. This all points to pressure on the U.S. dollar. With the dollar and gold having an inverse relationship, it bodes well for the metal.
As for SSR Mining, it's enjoying its first year as a larger company. Last year, it completed a merger of equals with Alacer Gold. The combined company now has four producing assets capable of between 700,000 gold equivalent ounces (GEO) and 800,000 GEO annually over at least the next five years. Comparatively, SSR Mining was yielding a little over 400,000 GEO prior to the deal.
What's this mean for the newly combined company? How about $450 million in projected free cash flow on an annual basis through 2022, as well as a balance sheet that features a $457 million net cash position. This excess capital is a big reason the company initiated a $0.05 quarterly dividend.
From a fundamental perspective, shares of SSR Mining can be scooped up at less than 8 times consensus earnings per share for 2021 and 2022, and roughly 4 times estimated cash flow per share. For added context, it's been my finding that a multiple of 10 times cash flow per share has historically represented fair value for gold-mining stocks. This makes SSR Mining quite the bargain for patient investors.
To round out the list of value stocks that'll make you richer in the second quarter and beyond, how about another well-known business that doubles as both a growth and value company? Investors, say hello to AstraZeneca (AZN 0.69%).
In recent weeks, AstraZeneca has received a lot of bad press regarding the safety of its coronavirus vaccine. But the buy thesis for this company has absolutely nothing to do with a vaccine developed in cooperation with Oxford University. Instead, it has everything to do with the growth in specialty indications and its pending acquisition of Alexion Pharmaceuticals (ALXN).
What's really been putting AstraZeneca back on the map after navigating its way around the patent cliff are its oncology drugs. Sales of its cancer therapeutics rose by 24% last year on a constant currency basis, with blockbuster trio Tagrisso, Imfinzi, and Lynparza leading the way. Next-generation diabetes drug Farxiga also delivered exceptional sales growth of 30% in 2020, excluding currency moves. These are indications where demand and pricing power are only increasing.
Investors should also be excited about the purchase of Alexion. What makes this deal so intriguing is Alexion's focus on ultra-rare therapeutics. Although there's risk in tackling research for a very small pool of patients, the reward if successful can be little or no competition and a high list price that's accepted by health insurers.
What's more, Alexion developed a next-generation version of its blockbuster therapy Soliris, known as Ultomiris. It's administered less frequently than Soliris, meaning it's a clear improvement in patient quality of life. What this does is secure Alexion's high-margin revenue stream for years to come.
Shares of AstraZeneca can be purchased for about 3 times next years' sales. More importantly, its PEG ratio, like Facebook, is just a bit over 1. There's ample upside here for patient value investors.