For more than a decade, everything on Wall Street has revolved around growth stocks. Historically low lending rates and the previous 11-year economic expansion gave fast-paced companies a free pass to romp higher.
But the guard may be changing.
Over the very long term (90 years, 1926-2015), value stocks have outperformed growth stocks. What's more, value stocks have historically done particularly well during the early stages of an economic recovery, which is where we are right now.
According to 12-month consensus price targets from analysts on Wall Street, five value stocks are particularly cheap, with implied upside ranging from 26% to as much as 50%. Even more interesting, these companies all originate from two specific industries: drug development and precious metal mining.
Vertex Pharmaceuticals: Implied upside of 34%
The first thing investors should understand about value stocks is that some of them can be growth stocks, too. This happens to be the case with specialty drug developer Vertex Pharmaceuticals (VRTX 0.81%), which is growing annually by a double-digit percentage but has a forward price-to-earnings ratio of just 16. If Wall Street's one-year price target of almost $285 proves accurate, Vertex offers investors about 34% upside.
Vertex's claim to fame is its line of successful treatments for cystic fibrosis (CF). CF is a hard-to-treat genetic disease characterized by thick mucus production that can obstruct the pancreas and lungs. Vertex has developed multiple generations of gene-specific treatments, including its latest blockbuster, combination therapy Trikafta. This newest drug applies to about 90% of all CF patients (it targets the most common mutation) and is projected to eventually hit $6 billion in annual sales. For some context, it generated close to $3.9 billion in sales in its first full year on pharmacy shelves in 2020.
Vertex is also loaded with cash. It ended last year with $6.66 billion in cash, cash equivalents, and marketable securities, which should give it more than enough capital to go shopping for treatments outside the CF space to broaden its revenue channels.
In short, it's a special company in the biotech space that's not getting nearly enough attention.
SSR Mining: Implied upside of 37%
There might not be an industry packed with more value at the moment than gold. Gold stocks have been cutting costs for the past half-decade. When coupled with a considerably higher gold price, we're left with companies that have high single-digit or low double-digit price-to-earnings ratios and oodles of cash flow.
In particular, mid-tier mining company SSR Mining (SSRM 0.45%) offers an implied upside of 37%, if we assume Wall Street's 12-month price target is correct.
Why SSR Mining? Last year, SSR completed a merger of equals with Turkey's Alacer Gold. The deal combined SSR's three producing assets (two gold mines and one silver mine) with Alacer's Copler gold mine. This merger effectively doubled estimated output over the next five years to between 700,000 ounces and 800,000 ounces of gold. What's more, free cash flow is estimated to be $450 million annually in 2021 and 2022. That's pretty incredible when you consider that SSR Mining ended 2020 with $457 million in net cash. Net cash positions are somewhat rare in the gold mining space.
SSR is also valued at between four and five times cash flow per share in 2021. After following the industry for more than a decade, my observation is that a cash flow multiple of 10 often denotes a fair valuation. In other words, this cash flow multiple suggests what Wall Street is already implying: There's luster still to come with SSR.
Viatris: Implied upside of 50%
Now, if you want a value stock that has Wall Street licking its chops, at least based on consensus price target, it's brand-name and generic drug developer Viatris (VTRS 1.55%). If the name doesn't ring a bell, it could be because the company was formed from the merger of Pfizer's Upjohn unit and Mylan in mid-November 2020, and it took on the new name. But it's a name investors might want to know, because Wall Street believes it offers 50% upside.
Combining Pfizer's established drug unit with a generic drug developer that's been contending with industrywide pricing pressures hasn't gone as planned, thus far. However, Viatris' management sees light at the end of the tunnel. The combined entity should be able to pay down $6.5 billion of its $26 billion in total debt through 2023, and it'll be realizing an estimated $1 billion in annualized cost synergies by 2023.
Furthermore, Viatris anticipates a return to modest growth in 2024, along with ramped-up investment in research and development. Keep in mind, though, Viatris will be churning out plenty of cash flow this year and every year leading up to, and beyond, 2024. That's the secret sauce that will allow it to pay down its debt, potentially repurchase some of its stock, and parse out a healthy 3% annual yield to shareholders.
One last thing: It has a consensus price-to-earnings ratio in 2021 (its expected trough year) of under four.
Barrick Gold: Implied upside of 44%
Have I mentioned that gold stocks are a beacon of value? If you prefer your mining companies on the larger side (SSR Mining is a midcap with a $3.4 billion market cap), Barrick Gold (GOLD 2.07%) is the stock to consider. With a consensus price target of $30.48, Wall Street believes Barrick could return 44% to shareholders over the next year.
Sometimes, size does matter. Barrick's enormous operations helped the company produce 4.76 million gold equivalent ounces (GEO) at an all-in sustaining cost (AISC) of $967 an ounce in 2020. Better yet, investments in underground automation at Kibali and Luolo-Gounkoto should allow these key assets to produce an AISC in the range of $800 to $900 per GEO in 2021. In short, Barrick Gold is fully capable of generating a margin of $800 to $900 per GEO over the physical price of gold. Not surprisingly, Barrick has generated around $4.5 billion in cumulative free cash flow over the previous two years.
Another interesting thing about Barrick Gold is the company's balance sheet, which has been greatly improved. In just the past eight quarters, the company's roughly $3.6 billion in net debt has turned into a positive net cash position of $33 million. Having this added financial flexibility should allow Barrick Gold to move forward with a number of projects designed to automate or expand output at its core mines.
Investors can scoop up shares of Barrick for less than seven times Wall Street's projected cash flow per share in 2021 and 2022.
Merck: Implied upside of 26%
Last, but certainly not least, Wall Street is expecting big things out of pharmaceutical stock and Dow Jones component Merck (MRK 2.35%). Based on where it ended the previous week, analysts are forecasting up to 26% upside for shares of the company over the next year.
If Merck is to power higher in the months to come, it's probably going to be on the heels of its blockbuster cancer immunotherapy Keytruda, which is approved to treat approximately two dozen types or stages of cancer. The most successful immunotherapy to date brought in $14.4 billion for Merck last year, representing a 30% increase from its 2019 full-year sales.
Keytruda is also being examined in dozens of additional clinical trials as a monotherapy or combination treatment. Between these label expansion opportunities, improving demand or duration of use in existing indications, and exceptional pricing power, Keytruda has an opportunity to eventually become the world's top-selling drug.
Beyond drug development, Merck is churning out growth from its animal health division. Sales were up 10% last year, excluding currency movements. There's steady growth potential to be had from developing treatments for companion animals, as well as ensuring the health of farmers' livestock.
At just over 10 times forward-year earnings, Merck has the look of a bargain.