For more than a decade, Wall Street and investors have focused their attention on growth stocks. That's because historically low lending rates and ongoing quantitative easing measures from the nation's central bank made it easy to access cheap capital.
But as we emerge from the pandemic recession, it's important to recognize that value stocks have both:
- Outperformed growth stocks over the very long run (17% average annual return, compared to 12.6% for growth stocks), according to a J.P. Morgan (JPM +1.78%) Asset Management report; and
- Done remarkably well during the early stages of economic recoveries.
In other words, those mindful of stocks valued at a discount to the broader market and/or their industry could be set to make a fortune. As we push into the second half of 2021, the following trio of value stocks has the potential to make investors a lot richer.
Image source: Getty Images.
Scratching your head a bit and wondering how the fast-growing social media giant Facebook (FB +1.33%) made it onto a list that's focused on value stocks? Believe it or not, Facebook qualifies as both a growth and value stock. Its revenue is regularly growing by 20% or more on an annual basis, and the company's forward-year price-to-earnings ratio of 23 (based on Wall Street's consensus estimate) is nearly in line with the benchmark S&P 500's forward-year estimated earnings multiple. In other words, with a price-to-earnings-growth ratio of around 1, Facebook is one heck of a bargain, even near an all-time high.
Facebook's attractiveness as an investment is based on its utter dominance of the social media space. When the company lifted the hood on its first-quarter operating results, it showed that 2.85 billion people visited its namesake site monthly, with another 600 million unique visitors headed to WhatsApp and Instagram, which Facebook also owns. Advertisers are fully aware that they're not going to find a broader audience on social media than the 3.45 billion monthly active users (44% of the global population) on Facebook. This is what gives the company such exceptional ad-pricing power, even during the pandemic.
Though it's a point I've noted repeatedly over the years, Facebook hasn't fully depressed the gas pedal yet. While on track to generate more than $100 billion in ad revenue this year, these ad dollars are originating almost entirely from its namesake site and Instagram. In other words, WhatsApp and Facebook Messenger are two of the six most-visited social sites in the world, yet Facebook hasn't begun meaningfully monetizing them yet.
And we can't forget about Oculus, the company's virtual reality (VR) device segment. Even though Facebook doesn't break out Oculus' specific sales, "Other" revenue in the first quarter skyrocketed 146% to $732 million. This jump was almost certainly the doing of higher Oculus sales. Look for these ancillary projects to buffer Facebook's impressive growth rate and modestly diversify its revenue channels.
Image source: Getty Images.
Jazz Pharmaceuticals
Biotech stocks aren't typically known as the place to search for deep discounts. Since most biotech companies are spending big bucks in search of a blockbuster drug, they're often unprofitable or valued at a huge multiple to future sales or profits. But that's not the case for Ireland-based Jazz Pharmaceuticals (JAZZ +7.68%). Even with Jazz nearing an all-time high, investors can purchase shares of the company for just above 10 times Wall Street's forward-year EPS consensus.
For more than a decade, Jazz has been leaning on growth from its top-selling drug, Xyrem, which is used to treat specific symptoms associated with narcolepsy. Over the years, Xyrem has benefited from increased uptake and significant pricing power. It effectively became a drug capable of $1.6 billion in annual revenue, or around two-thirds of Jazz's annual sales.
An exciting recent development is Xywav, which is a next-generation version of Xyrem that contains 92% less sodium. This reduction in sodium is a positive for patients with potential cardiovascular ailments. But most important, developing Xywav ensures that Xyrem's cash flow stays within the Jazz franchise, even when Xyrem's exclusivity period is gone.
Jazz Pharmaceuticals also recently closed on a $7.6 billion deal to acquire cannabinoid-based drug company GW Pharmaceuticals. GW Pharma's lead drug, Epidiolex, is approved to treat two rare forms of childhood-onset epilepsy and tuberous sclerosis complex. Epidiolex's sales topped $500 million in 2020, and could soon hit blockbuster status ($1 billion or more annually in sales) if its label expands and organic growth continues.
With a more diversified sales channel and rock-solid profitability, Jazz has the look of a biotech stock that could blast higher.
The all-electric 2021 Ford Mustang Mach-E. Image source: Ford.
Ford
A final value stock that can drive big gains to your portfolio in the second half of 2021, and well beyond, is Ford Motor Company (F +4.06%). Autos have historically been valued at lower price-to-earnings multiples than the benchmark S&P 500. However, with the auto replacement cycle pushing electric vehicles (EVs) into garages, Ford's growth rate in the U.S. and overseas could pick up handsomely in the years to come. That makes its forward P/E ratio of 8 a big-time bargain.
There are three huge catalysts that are expected to drive Ford's bottom line higher. First, as noted, EVs are a multidecade growth trend. In fact, the company recently announced that it would be spending at least $30 billion through 2025 to launch 30 EV models globally. That's up from a previous forecast that had the company on pace to spend $22 billion on EVs by 2023. In June, sales of the company's all-electric Mustang Mach-E surged 27% from May, and it unveiled the all-electric F-150 Lightning in mid-May.
The second big catalyst for Ford is China. All eyes might be on electrifying the U.S. market, but China is the largest auto market in the world. The electric auto market is even more nascent in China than it is in the United States. For Ford, this is an opportunity to pounce. Last year, the company increased its vehicle sales in China for the first time since 2017, potentially signaling momentum in the fast-growing market. And it certainly doesn't hurt that sales of its Lincoln-brand vehicles had their best first quarter ever in 2021.
The third and final growth driver is Ford's F-Series pickup. For the past 39 years, the F-Series pickup has been the top-selling vehicle in the United States. It's no secret that trucks and SUVs provide higher margins for automakers than sedans. As long as crude oil prices don't skyrocket, truck sales for Ford will help push profitability higher.
