These deeply discounted stocks are perfect for patient investors.
For more than a decade, growth stocks have left value stocks eating their dust. Historically low lending rates and a record-long bull-market run have wet the appetites of investors looking for game-changing growth stocks.
However, a 90-year study (1926-2015) from Bank of America/Merrill Lynch finds that value stocks have been the better performer over the long-term. What’s more, value stocks have historically outperformed during the early years of an economic recovery. With the S&P 500‘s Shiller price-to-earnings ratio higher than it’s been in nearly two decades, a focus on value may well be warranted.
As we move headlong into March, the following three value stocks stand out as particularly attractive and more than capable of making investors a whole lot richer.
1. AGNC Investment Corp.
The first stock value investors are going to want to consider getting into their portfolio is mortgage real estate investment trust (REIT) AGNC Investment Corp. (NASDAQ:AGNC).
Without getting overly technical, mortgage REITs are companies that borrow money at generally low short-term rates and buy assets (e.g., mortgage-backed securities (MBS)) that have higher long-term yields. The difference between the yield they receive and the yield they pay to borrow is known as the net interest margin (NIM). The wider the NIM, the more money mortgage REITs make. Pretty straightforward, right?
The most important thing for mortgage REITs like AGNC Investment is the yield curve. When the yield curve is flattening or the Federal Reserve is making rapid changes to interest rates, mortgage REITs often see their NIM shrink. Comparatively, when the yield curve steepens, which often occurs for the first few years of an economic recovery, NIM expands. With the yield curve steepening, AGNC should be able to use leverage to its advantage to further pump up its profits.
Something else investors might find interesting about AGNC is that it almost exclusively invests in agency-only securities. This means the MBSs AGNC is buying are backed by the federal government in the event of default. Even though agency assets have lower yields than non-agency securities, this added safety allows AGNC to utilize quite a bit of leverage with confidence.
AGNC ended last week at 10% below its book value and is on pace to pay out a hearty 9% annual yield to patient investors. It looks to be an especially safe bet in an otherwise volatile market.
2. SSR Mining
There may not be an industry that’s home to move value stocks at the moment than gold mining. Gold stocks have been hammered since the year began and now look like serious bargains. If you’re on the lookout for a cheap stock to add to your portfolio, SSR Mining (NASDAQ:SSRM) could be the company to consider.
To some degree, all mining companies are at the mercy of the underlying metals they produce. Since peaking seven months ago, the per-ounce price of gold has fallen by about $300. However, it’s still up significantly from where it spent much of the past decade, and its outlook remains lustrous. The Federal Reserve’s quantitative easing measures (i.e., monthly Treasury bond-buying), coupled with ongoing fiscal stimulus, will likely balloon the U.S. money supply and pressure the dollar. Since the U.S. dollar and gold have an inverse relationship, this bodes well for the yellow metal.
Beyond just a higher gold price, SSR Mining stands to benefit from its merger-of-equals with Turkey’s Alacer Gold. The deal, which was completed last year, nearly doubled SSR’s output potential to between 720,000 gold equivalent ounces (GEO) and 800,000 GEO per year. More than 85% of this production is gold, with the Puna Operations in Argentina kicking in between 6 million and 7 million ounces of silver in 2021.
Although SSR Mining’s all-in sustaining costs (AISC) of $1,050/gold ounce to $1,110/gold ounce in 2021 is a bit higher than its peers, this has to do with the company increasing capital expenditures at its longtime flagship Marigold mine, as well as advancing the development of Alacer’s Copler mine. Even with this higher AISC, SSR’s management is counting on $450 million in free cash flow in each of the next two years.
Additionally, take note that SSR Mining has one of the healthiest balance sheets in the entire gold industry. It ended the year with $860 million in cash and cash equivalents and a $457 million net-cash position. The company is also set to pay a $0.05 inaugural quarterly dividend on March 31, 2021.
Investors can scoop up SSR Mining for about 7 times earnings per share in 2021 and roughly 4 times cash flow.
3. Teva Pharmaceutical Industries
Finally, patient value investors can get richer by adding brand-name and generic drug-developer Teva Pharmaceutical Industries (NYSE:TEVA) to their portfolio.
Let’s not beat around the bush: A stock doesn’t decline nearly 90% without some serious faults. A couple of years ago, Teva grossly overpaid for generic drugmaker Actavis, and its previous management team settled bribery charges. More recently, it’s faced generic-drug price weakness, and has been hit with a multitude of lawsuits ranging from generic-drug price fixing to its role in the opioid crises. There are valid reasons Teva has been pummeled since 2016.
But there are an even greater number of reasons to be excited about its turnaround. Teva’s biggest catalyst is its CEO, Kare Schultz. Schultz is a turnaround specialist who took over in November 2017 and is expected to stay with the company through at least November 2023. During his tenure, Teva’s net debt has declined from north of $34 billion to less than $24 billion, as of the end of 2020. This has been accomplished by selling non-core assets, reducing operating expenses by roughly $3 billion annually, and using operating cash flow to pay down debt. By the end of 2023, net debt might be below $15 billion.
Aside from Schultz, Teva also looks to be moving beyond one of its biggest hurdles: the loss of exclusivity on blockbuster multiple sclerosis drug Copaxone. Once a $4 billion a year drug, Copaxone is expected to generate $1.05 billion in sales in 2021. The good news is that growth from Austedo and Ajovy are now more than cancelling out the annual sales declines in Copaxone.
With a forward price-to-earnings ratio of just 4, Teva looks as if it’s priced for a worst case-scenario. But if Schultz can negotiate settlements with the Justice Department over its remaining lawsuits, and he can do so without the company having to outlay much of its precious cash, Teva’s stock could quickly double.
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.
Sean Williams owns shares of Bank of America, SSR Mining Inc., and Teva Pharmaceutical Industries. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.