For more than 12 years, growth stocks have been the talk of Wall Street. Historically low lending rates and dovish monetary policy from the nation’s central bank have paved the way for fast-paced companies to borrow at attractive rates.
But over the very long run, value stocks have outperformed growth stocks. A study from Bank of America/Merrill Lynch found that value stocks delivered an average annual return of 17% between 1926 and 2015, which compared to a 12.6% annual return for growth stocks over the same period. While investors are unlikely to complain with double-digit annualized returns, it’s worth noting that value stocks have been the superior place to be during economic recoveries and periods of expansion.
As we move into the fourth quarter, the following three value stocks stand out for all the right reasons and have the potential to make shareholders a lot richer in the short term and, most importantly, well beyond.
Bristol Myers Squibb
First up, we have what’s arguably the cheapest Big Pharma stock on the planet, Bristol Myers Squibb (NYSE:BMY).
Before diving into the specifics about Bristol Myers, I believe it’s important to cover the safety inherent in most healthcare stocks. Since we don’t get to choose when we get sick or what ailments we develop, demand for prescription drugs, medical devices, and healthcare services tends to remain steady no matter how well or poorly the U.S. economy and stock market are performing. This creates a steady floor of cash flow for established healthcare companies.
As for Bristol Myers Squibb, it has two major catalysts that are powering its proverbial engine. First, the company’s internal drug-development program has notched numerous wins. Eliquis, which was developed in cooperation with Pfizer, has become the world’s leading oral anticoagulant and is pacing $10 billion (or more) in sales in 2021.
But it’s cancer immunotherapy Opdivo that may offer even more promise. Wall Street has been dragging its heels on Opdivo since it failed to hit the mark in a late-stage lung cancer study back in 2018. Yet analysts appear to be overlooking that Opdivo already has 10 approved indications in the U.S. and it’s being examined in dozens of clinical trials as a monotherapy or combination treatment. There’s a very good chance Opdivo’s label expands over time, which’ll only add to the $7 billion in sales it generated last year.
The second catalyst for Bristol Myers Squibb is acquisitions. In late 2019, it closed a cash-and-stock deal to buy cancer and immunology drug company Celgene. Multiple myeloma drug Revlimid was the true prize of this acquisition.
Revlimid has grown its annual sales by a double-digit percentage for more than a decade, with increased duration of use, strong pricing power, and label expansion opportunities in its sails. Best of all, Revlimid won’t face a flurry of generic competition until after Jan. 31, 2026, which means Bristol Myers has years left to reap the rewards of this key cancer drug.
Valued at a little north of seven times Wall Street’s forecasted earnings for 2022 and paying a 3.3% yield, Bristol Myers Squibb looks like an absolute steal.
AGNC Investment Corp.
Although the mortgage-REIT industry might seem complicated, given the various classifications of securities they carry in their portfolios, this industry can be quickly demystified in a single sentence. Mortgage REITs are simply looking to borrow capital at lower short-term lending rates, which can then be used to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS).
The difference between the average yield received from the MBS that a mortgage REIT holds, minus its average borrowing rates, is known as its net interest margin. The wider the net interest margin, the more profit potential for mortgage REITs.
The current place in the economic cycle in the U.S. makes AGNC particularly intriguing. Traditionally, a flattening yield curve — a situation where the gap between short-term and long-term Treasury yields is declining — and/or a swift-moving Federal Reserve are bad news for mortgage REITs. Conversely, a steepening yield curve and a slow-moving central bank are a recipe for book-value expansion for companies like AGNC Investment Corp.
Pretty much every rebound from a recession for the past half-century has featured a steady yield-curve steepening. It would appear the table is set for AGNC’s business to thrive.
Another factor working in AGNC’s favor is the company’s focus on agency-backed MBS. Agency securities are backed by the federal government in the event of default. Although this added protection lowers the yield AGNC receives from its MBS, it also allows the company to lever its bets in order to boost profitability.
The bottom line for investors is they can buy shares of AGNC Investment right now for about six times next year’s forecasted earnings and 9% below its book value. With a 9.1% dividend yield to boot, it checks all the boxes for value (and income) investors.
Walgreens Boots Alliance
Jumping back to the healthcare space, the third value stock screaming to be bought and held in the fourth quarter and beyond is pharmacy chain Walgreens Boots Alliance (NASDAQ:WBA).
Unlike Bristol Myers, Walgreens was one of a small number of healthcare companies that was hurt by the coronavirus pandemic. Pharmacies lean on foot traffic into their stores to drive front-end sales and discretionary purchases. With reduced consumer activity, Walgreens and its peers saw negative repercussions from the pandemic in 2020 and early 2021.
However, the good news is that Walgreens has been aggressively implementing a multipoint turnaround plan designed to cut costs and reallocate capital to higher-margin or faster-growing opportunities.
By the end of fiscal 2022, the company looks to be well on its way to recognizing over $2 billion in annual cost savings. But it’s also spent liberally on digitization. Even though Walgreens’ physical stores are its primary revenue generator, online sales can sustainably grow by a double-digit percentage for years to come.
As a Walgreens Boots Alliance shareholder, I’m most excited about the company’s partnership with VillageMD, which was first announced in July 2020. The duo will be opening up to 700 full-service clinics co-located in Walgreens’ stores in more than 30 U.S. markets.
Whereas most in-store clinics are limited to administering vaccines, Walgreens will have physician-staffed offices. The expectation is this venture will drive repeat businesses at the local level, as well as funnel patients right to Walgreens’ higher-margin pharmacy.
Value investors have the opportunity to gobble up shares of Walgreens for about nine times Wall Street’s consensus earnings for 2022, and they’ll net a 4.1% dividend yield while they wait for the market to come to its senses.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.