Every cloud has a silver lining. While the stock market has performed abysmally over the past 12 months, there are plenty of stocks available at steep discounts.
Three Motley Fool contributors were asked to identify dirt cheap stocks to buy in January. Here's why they chose Pfizer (PFE 0.38%), Teva Pharmaceutical Industries (TEVA 1.81%), and Vertex Pharmaceuticals (VRTX -0.10%).
Gearing up for a great year
Prosper Junior Bakiny (Pfizer): At first glance, it doesn't look like the next 12 months will be great for Pfizer. The pharma giant will almost certainly see its revenue and earnings drop in 2023 as sales of its coronavirus products decline. With difficult year-over-year comparisons, the company could scare off many investors.
But as Warren Buffett once said, it pays to "be greedy when others are fearful." Indeed, Pfizer could have a fantastic year on the clinical and regulatory fronts although that won't immediately impact its revenue and earnings.
But it will help the company establish a solid foundation for the post-pandemic years. What could make Pfizer's year such an important one? The company plans to launch more than 10 brand-new products, compared to its average of just one or two per year.
Here's another way to put that number in context. The U.S. Food and Drug Administration approved 37 new drugs in 2022. This year, Pfizer alone could get more than 25% of last year's total number of brand-new approvals. And it won't stop there. The company's new drug launches or label expansions over the next 18 months, which should total 19 according to CEO Albert Bourla, should generate $20 billion in sales by 2030.
Pfizer is predicting non-COVID-19 revenue between $70 billion and $84 billion by the end of the decade. In 2020, it reported total revenue of $41.9 billion. That was before it was able to sell its coronavirus-related products. Pfizer's shares deserve a premium with this much to look forward to. But that's not what investors are seeing.
The drugmaker's forward price-to-earnings (P/E) ratio currently sits at about 10, much lower than the pharmaceutical industry's average of 14.9. And that's before you factor in Pfizer's excellent profile as a dividend stock, which makes it an even more attractive investment. Investors seeking a great value play to start the year on a solid note should look no further than Pfizer.
Teva is trading at a steep discount
David Jagielski (Teva Pharmaceutical Industries): Generic drug maker Teva Pharmaceutical is coming off a decent year in 2022, with its 14% return outperforming the overall market. Despite the encouraging performance, the stock still trades at an incredibly low valuation. Although it's near the 52-week high, the stock's forward price-to-earnings multiple is only 4.
The company's earnings over the past 12 months have looked awful as Teva has incurred losses due to legal settlements and impairment charges. But there could soon be much less risk involving the company as Teva announced this week that it is moving forward on a nationwide settlement for opioid-related claims, citing a "sufficient level of participation."
Last year, the company agreed to pay up to $4.25 billion to settle the lawsuits. It's a positive development for Teva investors as it lessens some of the risk in the business by knowing that the settlement is likely to go through, minimizing the uncertainty.
In terms of operating income, Teva has been a fairly profitable company with an operating margin of 19% over the trailing 12 months. If not for legal expenses and non-operating costs, its bottom line would be much stronger, making it easier for investors to see the value in the stock.
For 2022, the company expects to see sales of around $15.1 billion, coming in lower than 2021's revenue of $15.9 billion as foreign exchange is weighing on the Israeli company's top line. However, Teva expects free cash flow to potentially come in as high as $2.2 billion, which is in line with how much it generated a year earlier.
Bearish investors will point to Teva's hefty debt load of $21.3 billion as a concern. But with significant free cash flow coming in and no dividend to worry about, the company is in good shape to continue paying down its debt.
Overall, the stock's discount looks really attractive. That's why buying shares of Teva right now could be a good move for contrarian investors.
A fantastic growth story
Keith Speights (Vertex Pharmaceuticals): Vertex Pharmaceuticals stock might not look like a tremendous bargain on initial inspection. The drugmaker's shares trade at 18 times expected earnings.
Vertex's share price also isn't beaten down as many biotech stocks are. Actually, the stock is up more than 30% over the last 12 months.
So why is Vertex on the list of dirt cheap stocks to buy in January? The answer is simple: It has a fantastic growth story that its current valuation doesn't fully reflect. Vertex's shares trade at a super-low price/earnings-to-growth (PEG) ratio of 0.38. Any PEG ratio below 1 is considered to be attractive.
The company has multiple growth drivers. Vertex should be able to deliver solid growth simply by securing additional reimbursement agreements and label expansions for its currently approved cystic fibrosis (CF) drugs. Competition isn't a concern right now, either. The closest rival is only in phase 2 testing.
Vertex and CRISPR Therapeutics appear to be in great shape to win regulatory approvals for exa-cel in treating sickle cell disease and beta-thalassemia later this year. The CRISPR gene-editing therapy could reach peak annual sales of more than $2 billion if approved.
Other possible blockbuster drugs could be on the way. Vertex's pipeline features three other late-stage candidates -- a CF combo more powerful than its existing CF drugs, a non-opioid painkiller, and a therapy targeting APOL1-mediated kidney disease. The company is also evaluating a program in early-stage testing that holds the potential to cure type 1 diabetes.
In addition, Vertex sits atop a massive cash stockpile of nearly $9.8 billion as of the end of the third quarter of 2022. Expect the company to continue putting that money to use in business development deals that boost its growth prospects even more.
