Although cases of COVID-19 in the U.S. have fallen to less than half of their numbers just two months ago, it's looking increasingly likely that there will be a long tail of demand for vaccines, boosters, and testing.
Despite that, the market seems to be losing interest in COVID stocks in general. But that volatility can be a long-term investor's best friend. That's why when we asked three Fool.com contributors for stocks they thought were ridiculously cheap, COVID stocks dominated the discussion.
Jason Hawthorne (BioNTech): By now, just about everyone has heard of BioNTech: It's the German drugmaker that partnered with Pfizer to develop the highly successful COVID-19 vaccine now known as Comirnaty. The messenger RNA (mRNA) therapy has seen significantly more commercial success so far than that of its mRNA peer, Moderna. By Nov. 2, BioNTech had delivered more than 2 billion jabs in 2021 alone. That dwarfs the "hundreds of millions" for Moderna since that company's vaccine rollout.
Still, investors are willing to pay significantly more for shares of Moderna because of the potential in its pipeline of candidates. Its market cap is about 50% higher than BioNTech's, although that gap has been shrinking since late summer:
Moderna boasts 37 programs in development and 21 in clinical studies spread across many different diseases; that's a lot of shots to hit it big. However, I believe BioNTech's focus on cancer -- coupled with its $17.5 billion in cash and receivables -- has it set up to deliver big profits for shareholders even if COVID revenue trails off. In fact, 16 of its 18 programs that have reached at least phase 1 trials are in oncology. The company also has multiple methods it is using to attack the disease even beyond its mRNA therapy.
BioNTech CEO Uğur Şahin isn't abandoning diseases like malaria, HIV, and tuberculosis. But both he and his wife have spent their lives researching cancer; it's why they founded BioNTech. It's also where the financial opportunity is in the drug development space: The market for cancer therapies is projected to reach more than $200 billion by 2024. Want further proof BioNTech is obsessed with cancer? Those two programs beyond phase 1 outside of oncology are both partnerships with Pfizer. It has retained full rights to almost all of its cancer-fighting drug candidates.
Both Moderna and BioNTech accomplished something amazing in 2020. And the world -- especially developed countries -- continues to benefit from their breakthroughs. But investing is about the future. And while Moderna's pipeline could be worth a lot, the more focused company is BioNTech.
Rachel Warren (Pfizer): If you want to invest in a top healthcare stock without breaking the bank, you don't have to look far. As Moderna's top rival in the coronavirus vaccine race and partner to BioNTech, Pfizer is a no-brainer option to consider if you'd like to invest in a major healthcare company with a robust pipeline and massive portfolio of top-selling products. Despite boasting a market capitalization of nearly $280 billion, Pfizer still trades at an extremely affordable $50 per share and at just about 15 times trailing earnings.
Pfizer increased its expected revenue guidance for Comirnaty yet again in its third-quarter financial report. Now, management is forecasting that the company will rake in revenue as high as $36 billion from the COVID-19 vaccine in 2021 alone. Pfizer reported total year-over-year revenue growth of 130% in the third quarter, thanks in large part to Comirnaty. But it's important to note that the company is also experiencing strong growth across a range of product categories that are driving healthy increases to its top and bottom lines.
If you exclude Comirnaty from its third-quarter revenue, Pfizer still reported a healthy 7% hike to its top line compared to the same quarter in 2020. Pfizer also generated robust year-over-year revenue increases from three of its top-selling drugs (Eliquis, Vyndaqel/Vyndamax, and Inlyta) in the third quarter, which surged by 19%, 42%, and 30% respectively. In addition, revenue from Pfizer's hospital products and biosimilars popped 29% and 34%, respectively, from the year-ago period.
Pfizer is projecting between $81 billion and $82 billion in full-year 2021 revenue, a noticeable spike from its 2020 revenue of $41.9 billion.
There's another great reason for investors to love Pfizer, and that's its dividend. Not only did the company return a whopping $6.5 billion in dividends to shareholders in the first nine months of 2021 alone, but the stock also yields an above-average 3.1%. For comparison, the average dividend-paying stock trading on the S&P 500 yields about 1.3%.
Pfizer's broad and fast-growing portfolio of pharmaceutical products could soon include its oral COVID-19 antiviral drug, which "was found to reduce the risk of hospitalization or death by 89% compared to placebo in non-hospitalized high-risk adults with COVID-19" in late-stage clinical trials. With that on the horizon, the future of this massive company looks brighter than ever. There's plenty of growth opportunity for long-term investors to benefit from, even if they're buying shares of Pfizer for the very first time. And with its dirt cheap price tag, this stock is simply too affordable to overlook.
Quit anchoring on the past so you can profit in the future
Steve Ditto (Fulgent Genetics): When we rely too heavily on the first piece of information we're given about a topic, psychologists call it "anchoring bias." That effect can cause you to miss new developments -- and in the case of Fulgent Genetics a real opportunity -- if you can't adjust your perspective.
Some investors may be falling victim to anchoring bias when they let Fulgent's extraordinary but fleeting growth from 2020 COVID testing cloud their perspective on the company's fast-growing genetic testing business. Fulgent management expects that business to generate revenue of $115 million in 2021, for a year-over-year increase of 215%.
That rate of growth would normally seem wildly impressive -- unless you're focusing on the 1,300% year-over-year growth Fulgent delivered in 2020. If you are, you might also miss how Fulgent delivered this revenue with gross margin above 80%, operating margin above 60%, and operational cash flow of $152 million. At that rate, by the end of the year, the company is likely to exceed $1 billion in cash and marketable securities on its balance sheet. That should be seen as quite the feat by anyone not anchored to the past.
The company deployed some of its cash in a flurry of Q2 acquisitions and hinted on the recent Q3 earnings call that there could be more mergers and acquisitions (M&A) announcements in Q4. Fulgent has been using the cash to diversify and expand its genetic testing business from a focus on pediatric testing, to now include cancer testing and molecular diagnostics.
The genetic testing market is a large, growing, and highly impactful corner of healthcare. Cathie Wood of ARK Investment Management projects that multi-cancer screening could become a $150 billion market, and avert 66,000 cancer deaths per year in the U.S. In addition, China is projected to be another $45 billion market opportunity.
If a growing, profitable business in a large, attractive market isn't enough to break from anchoring in the past, then a quick look at valuation might make the difference. At $93 per share, Fulgent has a $2.7 billion market cap. However, $1 billion of that market cap should be cash and marketable securities by the end of the year. Assuming the company reaches $200 million in its core genetic testing business in 2022, the company will be valued at less than 7 times sales, and will be far more profitable than most companies with that or higher multiples. Any continued COVID-related revenue will just make the valuation look even better.
Hopefully the proof points of 2021 will help investors realize Fulgent may actually be absurdly cheap. For patient long-term buy-and-hold investors, Fulgent Genetics may be one of the best value healthcare stocks out there, and a great way to build your portfolio.