It has been said that the stock market may be the only place where buyers get cold feet when the prices drop. It's funny to think about. Shouldn't you want to buy stocks when they are cheaper?
We asked three Fool contributors what stocks they think are cheap right now. They came up with Healthcare Services Group (HCSG -1.59%), Pfizer (PFE -0.48%), and Fulgent Genetics (FLGT -1.99%). Here's why.
Jason Hawthorne (Healthcare Services Group): Not every company in the healthcare industry is exciting. Far from the boom or bust world of biotechnology and the innovation of robotic surgeries and gene sequencing is Healthcare Services Group. The company provides laundry and linen services, facility maintenance, and dietary services to healthcare facilities. It serves customers from hospitals to retirement complexes. Housekeeping contributes a little more than half of the company's revenue. But business hasn't been great.
Overall, revenue fell 4.4% in 2020. The decline was due to COVID-19 -- both directly and indirectly. The stock has been beaten up over the last few years, falling 52% since the beginning of 2018. Management expects growth to return beginning next quarter. But investors aren't counting their chickens before they hatch. When Wall Street looks at the company it sees two black eyes that keep the negative sentiment in place, and it has pushed the stock to near its lowest price-to-sales ratio in a decade.
Perhaps the biggest mark against the company is an ongoing investigation by the Securities and Exchange Commission into how it calculated its earnings per share for years. The company received a subpoena in November 2017, but didn't disclose it until March the following year. The company's own internal audit was completed a year after that. Management has said it has been discussing a final resolution to the issue with the agency.
Another concern is its dependence on its largest customer -- a struggling operator of skilled nursing facilities. In the past three years beginning in 2018, that account represented 19.3%, 15.6%, and 14.7% of Healthcare Services' revenue, respectively. In the recently reported second quarter, Healthcare Services Group modified its agreement with the customer. The amended contract reduced revenue but helps keep the customer afloat as it restructures.
On the positive side, Healthcare Services Group offers a steady dividend. The stock currently yields 3.3%. Management has raised the distribution for 72 consecutive quarters. The increases aren't large, but the consistency is nice. What began as a $0.01 payout in the third quarter of 2003 is now almost $0.21 per share. Overall, the dividend has climbed nearly 14% over the past five years.
Investors picking up shares today aren't likely to get rich anytime soon. But Healthcare Services Group is one of the cheapest healthcare stocks in the market. If it can manage through the current uncertainty, it should offer a healthy return for shareholders who can stomach the risk.
A tried and true healthcare stock that's also a compelling dividend play
Rachel Warren (Pfizer): In a market period where many top stocks continue to be woefully overpriced, it's refreshing to find quality companies still trading at reasonable valuations. Pharmaceutical giant Pfizer is one of them, trading at just around $50 per share at the time of this writing.
This is quite remarkable, given that Pfizer has been the subject of tremendous headline hype since the pandemic began due to its highly successful collaboration with BioNTech, which produced the blockbuster coronavirus vaccine Comirnaty. The vaccine partners have inked a long list of global supply deals which will rake in many billions of dollars for Pfizer not just in 2021 but over the next few years at least.
And with the recent news that recipients of the Pfizer/BioNTech vaccine will likely need a booster shot, these supply deals are almost certain to be expanded and extended further into the decade. In Pfizer's most recent quarterly report, management said it expects Comirnaty to amass revenue of nearly $34 billion this year alone, way up from the company's previous projection of $26 billion. On Aug. 23, Comirnaty received the landmark distinction of being the first COVID-19 vaccine approved by the FDA.
While shares of Pfizer haven't jumped by newsworthy levels over the past year, it's still delivered steady gains for long-term investors. The stock is currently trading about 30% higher than it was at the beginning of this year. Shareholders can also glean sustained portfolio growth from Pfizer in the form of its robust dividend. Yielding 3.2% based on current share prices, it definitely outpaces the yield of the average company trading on the S&P 500, which is approximately 2%.
The commercial gold mine that is Comirnaty has certainly provided a massive boost to Pfizer's balance sheet. In its second-quarter earnings release, Pfizer reported its revenue surged 86% from the year-ago period. But even if you were to leave Comirnaty out of its financials for the quarter, Pfizer still generated a healthy 10% rate of year-over-year revenue growth. The company has a diverse collection of fast-growing business segments that cover pharmaceutical areas ranging from oncology to rare diseases and include blockbuster products like Eliquis (a blood thinner), Prevnar 13 (a pneumococcal vaccine), and Ibrance (an oral treatment for metastatic breast cancer).
From its strong track record of revenue growth to its attractive dividend to its robust lineup of in-demand products, Pfizer is a fantastic stock you can buy and hold for many years to come.
Just getting started
Steve Ditto (Fulgent Genetics): In 2020, Fulgent Genetics was a key provider of COVID-19 testing and saw its revenue increase by almost 1,300% over the prior year. Few companies benefited more during the pandemic and few have a bigger cloud of uncertainty hanging over them as investors try to figure out what the future holds.
Fulgent stock hit an all-time high of $189.89 in February and since then has fallen more than 52% as COVID-19 testing has declined precipitously. The market doesn't like uncertainty but for long-term investors, the real question is what comes next.
Fulgent has a growing genetic testing business for pediatric diseases, which management expects to generate revenue of $110 million in 2021, representing a 201% year-over-year increase. That's a growth story investors should be following.
In last year's fourth-quarter conference call, CEO Ming Hsieh discussed his interest in acquisitions to expand the core diagnostic business. In Q2, Fulgent management followed up on its intent with a flurry of deals. Fulgent bought CSI Laboratories for its oncology testing and molecular diagnostics, made a $20 million investment in Helio Health for early cancer detection, and increased its $19 million majority stake in Chinese joint venture FF Gene Biotech for cancer testing in China.
The potential for multi-cancer screening is mind boggling -- in both financial and human terms. Based on a single liquid biopsy (blood test), multi-cancer screening can detect dozens of early-stage cancers before they spread and become harder to treat. Pharma companies are advocating and paying for genetic cancer screening since it improves the outcomes and will drive demand for their therapies. Innovation investors like Cathie Wood, CEO of ARK Investment Management, project multi-cancer screening could become a $150 billion market and avert 66,000 cancer deaths per year in the U.S.
Fulgent has proven to be a very capable operator generating operating margin above 60% and ending Q2 with $777 million in cash on its balance sheet. The operational and financial proof points from the last year should give investors confidence Fulgent can grow profitably and use its cash to pursue strategic growth opportunities.
The good news is Fulgent isn't just a COVID-19 story. For patient long-term buy-and-hold investors with a tolerance for some uncertainty, Fulgent Genetics may actually be the best value healthcare stock out there and a great way to build your portfolio.