The Dow Jones Industrial Average is an index made up of 30 of the largest and most influential companies on U.S. stock exchanges. The index has historically returned around 7.5% each year, so being up over 15% makes 2021 a year to celebrate.

Not every stock in the Dow Jones has performed well. The three stocks we'll discuss are all down and have been since the beginning of 2021, despite the index being up so much. We'll look at each one to determine whether they represent an opportunity or are down for a good reason.

1. Amgen

Biotech company Amgen (AMGN 0.89%) has been down about 7% since the beginning of 2021. The company develops and sells drugs aimed at inflammation, cancer, bone health, heart disease, and more.

A smiling person using binoculars.

Image source: Getty Images.

When a company invents a successful drug, its formula is patented, protecting it from direct competition for many years. Medications can cost millions of dollars to research and develop but can fail when tested in trials. A successful drug sometimes referred to as a blockbuster, can bring in billions in revenue over the length of its patent.

Investors can get a feel for the trajectory of a drug company by following when its key products lose their patent protection. Once this happens, generic competitors flood the market at lower prices, significantly reducing the original drug's sales.

Many of Amgen's primary products could lose sales when their patents expire:

  • Enbrel (19% of revenue) expires in the U.S. in 2029.
  • Prolia (12% of revenue) expires in the U.S. in 2025. 
  • Otezla (9% of revenue) expires in the U.S. in 2028.
  • Xgeva (8% of revenue) expires in the U.S. in 2025.

The United States has a more-complicated patent system, where drug companies can extend their patents by making minor changes to them. This, combined with the high drug prices charged in the U.S. market, is why domestic sales account for 68% of Amgen's global revenue. As these patents expire over the next decade, the company will need its pipeline to deliver successful products to replace this lost revenue.

The stock currently trades at a price-to-earnings ratio (P/E) of 12 using analyst estimates for 2021 earnings per share (EPS), far less than its historical average of 17. Analysts are calling for growth of 8% per year over the next three to five years, and pharmaceutical companies face political pressure in the United States due to drug prices. These risks probably justify a discounted valuation, and that's just what the stock offers at these levels.

Verdict: thumbs-up

2. Merck 

A rival to Amgen, Merck (MRK 0.38%) develops drugs for cancer, immunology, and virology, as well as vaccine products, along with a separate business unit that develops drugs for veterinary use. The stock has maintained its 11% decline since the beginning of the year.

Merck doesn't have a patent cliff that's quite as imminent as Amgen's. Its Januvia/Janumet accounts for about 10% of sales, and its patent expires in 2022, but the patents for the rest of Merck's significant drugs like Keytruda (34% of revenue) and Gardasil (15% of revenue) don't expire until 2028.

The company also released positive results from its clinical trials on molnupiravir, a pill that, when taken at the early stages of COVID-19 infection, can reduce the risk of serious illness by 30%. Merck has already agreed to sell more than $2.2 billion in treatments, so as the omicron variant continues to spread, it could give a spark to Merck's business. Rival Pfizer is also bringing a similar pill to market, but there could be enough demand for both to succeed here.

The stock is trading at a P/E of 11, a significant discount to its historical P/E of 27. Analysts are calling for modest growth of 6% per year over the next three to five years, but that might be conservative due to COVID treatments. Investors might not be factoring in the potential business from the COVID pill, and the valuation markdown could provide a margin of safety.

Verdict: thumbs-up

3. Verizon Communications

Down 14% year to date, telecom company Verizon Communications (VZ 1.57%) is among a select few companies that control the wireless networks in the United States. The infrastructure that supports our nationwide phone network costs billions of dollars and took years to build out, so there is a minor threat from outside competition, even with fierce competitors like AT&T and T-Mobile.

The stock trades at a P/E of just over 9 based on 2021 EPS estimates. This is a bargain valuation if we look at its historical average, 14. While many would assume that 5G technology would unlock a lot of growth, Verizon has historically been a slow-growing business even with the emergence of 3G and 4G networks over time.

Analysts estimate the company's three-to-five-year EPS growth at around 3% annually. Defensive investors who want a solid dividend can benefit here: It pays a dividend that yields 5% and needs just half of its profits to afford that payment. Investors focused on total returns probably won't get excited about Verizon, even at this reduced valuation.

Verdict: thumbs-down