The temperature isn't the only thing headed higher this August. Since bottoming out on March 23, 2020, the benchmark S&P 500 has been virtually unstoppable. Seemingly hitting one record high after another, the widely followed index has gained 98% in just a shade over 16 months.
While some investors might be hesitant to put money to work with the broader market constantly nipping at new highs, history has shown that it's always an opportune time to buy if high-quality companies are on your shopping list. The following trio of top stocks have all the tools necessary to make investors a lot richer in August, and likely well beyond.
Annaly Capital Management
If there's a value/income stock worth pounding the table on right now, it's mortgage real estate investment trust (REIT) Annaly Capital Management ( NLY 0.47% ). If you're wondering why I don't own it, the answer lies with The Motley Fool's transparent disclosure policy -- i.e., I can't shut up for long enough about Annaly in recent articles to actually buy it for my own portfolio.
For many, the mortgage REIT model sounds complicated or intimidating. However, the operating goal of mortgage REITs like Annaly is pretty straightforward. The idea is that Annaly borrows money at lower short-term rates and uses that capital to acquire higher-yielding long-term assets, such as mortgage-backed securities (MBSs). The difference between these higher-yielding MBSs and the borrowing rate is known as the net interest margin. Generally speaking, the wider this margin, the more profitable Annaly will be.
Now, here's where things get fun. Annaly Capital Management, and all of its mortgage REIT peers for that matter, are interest rate sensitive. When the Treasury yield curve is flattening, or when the Federal Reserve is making significant adjustments to the federal funds target rate (e.g., 50 basis points or more at a time), Annaly often sees its net interest margin decline.
Meanwhile, when the yield curve steepens and long-term yields gallop higher, net interest margin for mortgage REITs typically widens. Yield curve steepening is most commonly observed in the early to middle stages of an economic recovery, which is precisely where we are right now. Put another way, the next couple of years should be when Annaly's operating performance is at its peak.
What's more, Annaly's portfolio is specifically packed with agency securities. These are assets backed by the federal government in the event of a default. The company ended June with almost $66.5 billion in agency MBSs, compared to just over $0.8 billion in non-agency MBSs. Though the yields on agency securities are lower than non-agency assets, this added protection allows Annaly to utilize leverage to inflate its profits.
What investors are getting with Annaly is a company that's averaged about a 10% yield for two decades and has paid out over $20 billion in dividends since its inception. With modest share price appreciation also in the cards, it's an excellent bet to help trounce rising inflation.
Over the past five weeks, Exelixis has shed nearly a third of its value. This decline has to do with a June 28 data release from the ongoing phase 3 COSMIC-312 trial involving Cabometyx (Exelixis's lead drug) as a treatment for previously untreated advanced liver cancer.
While the combination of Cabometyx and Tecentriq produced a statistically significant improvement in progression-free survival, Exelixis noted that, based on preliminary overall survival (OS) data, it's unlikely the combination reaches statistical significance in OS. This suggests first-line advanced liver cancer may not be in the cards anytime soon for Cabometyx.
While this is clearly not good news, it's also not the terrible news Wall Street has made it out to be. Cabometyx can produce more than $1 billion in annual sales solely from its existing indications. There are also around 70 ongoing clinical trials involving Cabometyx as a monotherapy or combination treatments. Historic clinical data shows that most cancer trials aren't going to be successful. But if even a handful of these studies lead to label expansion opportunities, Cabometyx could generate $2 billion or more in annual sales.
Keep in mind that one of these roughly six dozen studies already resulted in a U.S. Food and Drug Administration (FDA) approval. Earlier this year, the FDA gave the green light for the combination of Cabometyx and Bristol Myers Squibb's cancer immunotherapy Opdivo as a first-line renal cell carcinoma treatment.
Exelixis is swimming in cash, as well. It ended March with $1.6 billion in cash, cash equivalents, and restricted cash equivalents and investments. This capital will be used to expand Cabometyx's label, reignite the company's internal growth engine, and possibly to make acquisitions. In other words, Exelixis is growth and value wrapped up into one company.
While the entire U.S. cannabis industry would likely cheer the federal legalization of weed, the fact remains that it's not necessary for pot stocks to deliver the green. That's because 36 states have legalized medical marijuana, 18 of which have also passed legislation to authorize the consumption and/or retail sale of recreational weed. If the federal government continues to allow individual states to regulate their respective industries, the cannabis industry can shine.
What makes Trulieve Cannabis such an interesting case is the company's approach to expansion. Instead of planting its flag in as many billion-dollar markets as possible like other multistate operators (MSOs), Trulieve has focused its attention on one state, Florida. On July 21, the company opened its 87th dispensary in the medical marijuana-legal Sunshine State. For context, it only has nine other retail locations currently open outside of Florida.
By saturating the Florida market, Trulieve has been able to build up its brands and a loyal following while at the same time keeping its marketing costs down. As a result, it's delivered 13 consecutive quarterly profits and controls approximately half of the Sunshine State's dried cannabis flower and cannabinoid oils market.
But make no mistake about it, Trulieve has aspirations outside of Florida, too, as evidenced by its pending $2.1 billion all-stock acquisition of MSO Harvest Health & Recreation ( HRVSF ). Harvest Health has a five-state focus, one of which happens to be Florida. That's right, Trulieve's Sunshine State dominance is set to grow even more. But it's Harvest Health's home market of Arizona that's the real prize of this deal. With 15 dispensaries in Arizona, a state that legalized recreational weed in November 2020 and commenced adult-use sales in January 2021, Trulieve should be able to carve out a large portion of what should become a billion-dollar cannabis market.
Once this deal closes, Trulieve Cannabis may well be regarded as the model pot stock that other companies will follow.