It's no secret that growth stocks have run circles around value stocks since the Great Recession ended in 2009. It's also plainly evident that historically low lending rates are working in favor of fast-growing businesses. But when it comes to long-term history, value stocks rule the roost.
A 2016 report from Bank of America/Merrill Lynch examined the collective performance of growth stocks and value stocks over 90 years (1926-2015). While growth stocks averaged a healthy 12.6% annual gain over nine decades, it was the 17% average annual gain from value stocks that stood supreme.
What's more, BofA/Merrill Lynch noted that value stocks have a tendency to significantly outperform growth stocks during the early stages of an economic recovery, which is where we are right now.
With this being said, the following trio of value stocks looks ripe for the picking and have all the tools needed to make investors richer in May (and beyond).
Who said Big Pharma can't still be a lucrative investment opportunity? Pharmaceutical stock Merck (MRK -0.22%) may have languished for the past two decades, but its product portfolio has all the makings of an outperformer over the next 10 years.
The true star for Merck in the years to come is cancer immunotherapy Keytruda. Last year, it generated $14.4 billion in sales (an increase of 30% from 2019), with first-quarter sales through March 2021 up another 19% to $3.9 billion from the prior-year period. Keytruda is being examined in dozens of clinical trials as both a monotherapy and combination treatment. If even a handful of these studies prove successful, Keytruda's already robust label will enjoy further expansion. Once AbbVie's anti-inflammatory blockbuster Humira loses patent exclusivity, Keytruda will likely become the top-selling drug in the world by annual sales.
Another reason to like Merck here is the relatively unjustified weakness following its first-quarter operating results. The big drag was the 16% decline in Gardasil vaccines from the prior-year period. The thing to understand is this decline was driven by the pandemic and people not visiting their doctors as regularly. It had nothing to do with any safety or overlying demand concerns. That's an open-door opportunity to snag temporarily discounted shares of Merck.
Furthermore, Merck's animal health division is rapidly turning into a beast. Though a majority of its revenue derives from livestock, it's the company's companion animal segment that's signaling the most robust growth -- a 26% revenue increase in Q1 2021 to $599 million, as compared to the year-ago quarter. Animal health now represents almost 12% of companywide sales, which isn't a bad thing considering how willing pet owners and farmers are to open up their wallets.
With Merck expected to grow sales by a mid-to-high single-digit percentage through at least mid-decade, a forward price-to-earnings ratio of 10 is a bargain. Tack on a 3.5% dividend yield for being patient, and you have more than enough incentive to add Merck to your portfolio.
Most gold stocks overextended themselves following the 2009-2011 rally in the lustrous yellow precious metal. This coerced many producers to close high-cost mines and whittle away at their debt over the past half-decade. However, with gold prices bouncing notably in recent years, robust cash flow has put gold stocks on considerably better financial footing.
The macro case for SSR Mining, and most gold stocks, is that historically low yields and/or higher inflation are the new norm. With income seekers struggling to find safe ways to generate inflation-topping returns, more investors are likely to turn to physical gold as a store of value and protection from inflation.
On a more company-specific basis, SSR is set to realize the benefits of its merger of equals with Turkey's Alacer Gold in 2020. Combining SSR's two gold mines (Marigold and Seabee) and one silver mine (Puna operations) with Alacer's Copler mine nearly doubles its output potential to between 700,000 and 800,000 gold equivalent ounces (GEO) per year, through mid-decade.
What's particularly intriguing about this merger is that it combines the output growth potential of Alacer's core asset with SSR's conservative balance sheet. This is a company that ended 2020 with $457 million in net cash -- most gold stocks sport a net debt position -- and is fully expected to generate $450 million in free cash flow annually in 2021 and 2022. It's no wonder a $0.05 quarterly dividend has been initiated and share buybacks are possibly on the table.
But the real eye-opener is how cheap SSR Mining is relative to its cash flow. Having followed gold stocks for over a decade, I'm of the opinion that a multiple of 10 times cash flow represents a fair valuation for mining companies. SSR Mining can be scooped up for less than 5 times cash flow in 2021 and 2022. That's a golden opportunity.
Usually, healthcare stocks are able to mostly shrug off recessions. That's because they provide basic-need goods and services. In other words, people who needed prescription drugs before a recession are still going to need those same therapies during and after, as well. Unfortunately, CVS hasn't been so lucky. The coronavirus pandemic has reduced traffic to its stores, hurting front-end sales and its clinics. But as with Merck, this short-term pain can be your long-term gain.
One of the catalysts that really stands out about CVS is the company's out-of-the-box thinking that culminated in the 2018 acquisition of health-benefits provider Aetna. Choosing to grow vertically in a highly competitive industry should be a smart move. Aetna will boost CVS's organic growth rate, and the combination is still yielding additional cost synergies. Maybe most important, there's now an incentive for Aetna network members to visit CVS pharmacies.
CVS Health is also aggressively going after people with chronic illnesses. The company's goal is to open approximately 1,500 of its HealthHUB health clinics nationwide. These clinics will primarily focus on getting chronically ill people in touch with specialists. If these folks can be funneled into CVS's high-margin pharmacy on a repeat basis, CVS makes more money, and chronically ill people lead better quality lives.
This is a company that should benefit from an aging U.S. population, too. As baby boomers age, they're more likely to become reliant on prescription drugs.
Buying into CVS now would net value investors a company trading at less than 10 times forward-year earnings that's also paying out a healthy 2.6% yield.