When President Biden took office nearly four months ago, he inherited some of the worst economic conditions in decades. The disruption caused by the coronavirus pandemic turned the No. 1 economy in the world on its head.
Yet the Biden administration might be in the right place at the right time. You see, the Federal Reserve's dovish monetary policy and its monthly bond-buying program, coupled with beefed-up stimulus spending from Capitol Hill, have created the perfect situation for the U.S. economy and stocks to thrive. No one should be surprised if a runaway Biden bull market takes shape.
The thing to remember is that, while growth stocks have outperformed value stocks for over a decade, it's value stocks that have historically outpaced growth stocks over the very long run and (most importantly) during the early stages of an economic recovery. Thus, a runaway Biden bull market would likely favor value over growth, according to what history tells us.
If you're looking to put your money to work right now to take advantage of these perfect conditions for equities, consider buying the following four surefire value stocks.
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Bristol Myers Squibb
Pharmaceutical stocks are often a great place to park your money regardless of how the U.S. economy is performing. That's because people need life-saving and maintenance-focused prescription drugs no matter how well or poorly the U.S. economy is doing. This makes Big Pharma stocks like Bristol Myers Squibb (BMY +0.12%) cash flow kingpins.
The Bristol Myers story has two key catalysts. On one hand, the company expects ample organic growth to drive sales and profits higher. It co-developed the leading oral anticoagulant (Eliquis) with Pfizer, and it developed one of the world's top cancer immunotherapies (Opdivo). Opdivo is currently being studied in dozens of clinical trials and has a good chance of further expanding its label indications. Last year, Opdivo generated $7 billion in sales, and it could well become a $10 billion a year treatment.
The other side to Bristol Myers Squibb is its inorganic growth. In November 2019, the company completed its buyout of cancer drug and immunology therapy developer Celgene. The real prize of this acquisition was bringing multiple myeloma drug Revlimid into its portfolio. Revlimid has grown annually by a double-digit percentage for more than a decade, and it's benefited from increased duration of use, label expansion, and strong pricing power. This key drug is protected from a full onslaught of generic competition until the end of January 2026.
Opportunistic value investors can scoop up Bristol Myers for just 8 times forward-year sales and will be rewarded with a 3% dividend yield while they wait.
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Annaly Capital Management
Although most financial stocks have skyrocketed higher over the past six months, bargains can still be unearthed. I believe mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 0.68%) is the perfect example.
Mortgage REITs are companies that borrow money at lower short-term rates to buy assets that offer higher long-term yields, such as mortgage-backed securities (MBS). The goal here being to get as wide a gap between the higher incoming yield and the outgoing borrowing rate (this is known as net interest margin, or NIM). When the U.S. economy is on the mend, it's not uncommon to see the yield curve steepen, which has the effect of widening Annaly's NIM.
What's more, Annaly Capital Management almost exclusively purchases agency securities. This means it buys assets that are backed by the federal government in the event of a default. As you might imagine, having this added protection means agency assets have lower yields than non-agency assets. However, this protection allows Annaly to use leverage to its advantage to pump up its profits.
For the past two decades, Annaly has averaged an annual dividend yield of roughly 10%, and it can essentially be purchased for its book value. It's a surefire value stock that income seekers will love.
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Vertex Pharmaceuticals
Keep in mind that value stocks can be growth stocks, too. Specialty biotech stock Vertex Pharmaceuticals (VRTX 1.72%) is a good example of a company that's consistently growing by a double-digit percentage, yet has a price-to-earnings-growth ratio (PEG ratio) of well below 1. A PEG below 1 is usually considered "undervalued."
What allows Vertex to really stand out from the crowd is its success in treating patients with cystic fibrosis (CF). CF is a genetic disease characterized by thick mucus production that can clog the lungs and pancreas. Though it has no cure, Vertex has developed a handful of mutation-specific treatments designed to improve lung function and quality of life.
The latest treatment, combination drug Trikafta, easily met its primary endpoint in phase 3 trials and was approved by the U.S. Food and Drug Administration five months ahead of its scheduled review date. Trikafta targets the most-common CF mutation, which makes it available to approximately 90% of all CF patients. Peak annual sales are expected to eventually hit $6 billion.
Vertex is also overflowing with capital. It ended March with $6.9 billion in cash and cash equivalents. This capital will be used to continue research of the company's one dozen internal compounds, as well as to make acquisitions to diversify its drug portfolio.
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In case you weren't paying attention, I'll say it again: Value stocks can be growth stocks, too. I know thinking of fast-growing social media giant Facebook (FB 3.77%) as a value stock might sound like a stretch. However, it's growing its revenue at 20% to 25% annually, yet can be purchased for roughly 20 times Wall Street's consensus earnings per share for 2022. That, my investing friends, firmly classifies Facebook as a value stock.
As of the end of March, Facebook had 2.85 billion monthly active users visiting its namesake site. It also had another 600 million unique visitors going to either WhatsApp or Instagram on a monthly basis, which Facebook also owns. Put another way, approximately 44% of the world's population logs into a Facebook-owned asset at least once a month. This is what makes Facebook the go-to destination for advertisers, and is why Facebook's ad-pricing power is superior to all other social media companies.
What's so hard to believe is that Facebook is accomplishing such tremendous growth while only running on half its engine. Though it's monetized Facebook and Instagram, neither WhatsApp nor Facebook Messenger have been meaningful monetized, as of yet. When Facebook waves the green flag on these assets, its cash flow is going to ascend to the heavens.
Keep in mind that Facebook has growth options beyond advertising, too. The company's "Other" segment, which includes its Oculus virtual reality devices, saw triple-digit growth in the first quarter. The point is that Facebook is still a high-growth company, but it's being priced as if it's a slower-growing value play. That's an opportunity for patient investors if a Biden bull market takes shape.
