As pharmaceutical companies began to announce positive vaccine results last fall, value stocks started to take center stage in anticipation of the economy opening back up. This resulted in the SPDR 500 Value ETF (SPYV) outperforming the SPDR 500 Growth ETF (SPYG) 28.8% to 13.4% from October 28th to March 19th.
However, since then value stocks have stopped outperforming growth stocks. Most investors think that the economic reopening is already priced in, which is certainly the case for many cyclical stocks. But I believe value stocks still have plenty of upside left. First of all, value stocks are still cheap. According to Yardeni Research, the S&P forward P/E for value stocks is only 18, compared with 28.6 for growth stocks.
Secondly, economic growth is expected to increase more as the economy continues to reopen, which suggests we are still in the middle of this business cycle. Historically, value stocks have outperformed growth during the middle of a business cycle. This is why I recommend investors consider value stocks such as Sanofi (SNY), Lockheed Martin Corporation (LMT), CVS Health Corporation (CVS), and Cigna Corporation (CI).
Sanofi (SNY)
SNY is a global pharmaceutical company headquartered in Paris, France. It operates through 4 divisions: Pharmaceuticals, Vaccines, Generics and Consumer Health. The company develops and markets drugs with a concentration in oncology, immunology, cardiovascular disease, diabetes, and vaccines. Though its decision in 2019 to pull back from the cardio-metabolic area will likely reduce its footprint in this therapeutic area.
The company’s portfolio of branded drugs and vaccines and its robust pipeline have created strong cash flows. SNY’s existing product line includes several top-tier drugs, including insulin treatment Lantus. Lantus works well for an entire day, which sets it apart from other insulins drugs.
The company also has a strong group of late-stage pipeline products, including immunology drug Dupixent, which holds strong pricing power and blockbuster potential across various indications.
SNY has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The company has a Value Grade of A, which isn’t surprising with a tiny trailing P/E of 8.76. The company also has a Stability Grade of A, which means its price performance and growth history have remained consistent.
We also provide the following grades for SNY: Growth, Momentum, Sentiment, and Quality. You can find those here. SNY is ranked #24 in the Medical – Pharmaceuticals industry. You can find other top-ranked stocks in this industry by clicking here.
Lockheed Martin Corporation (LMT)
LMT is the largest defense contractor globally and has dominated the Western market for high-end fighter aircraft since it was awarded the F-35 program in 2001. Its main focus areas are defense, space, intelligence, homeland security, and information technology, including cybersecurity. Its largest segment, though, is Aeronautics, which is dominated by the massive F-35 program.
The company’s F-35, the largest weapon program in history, should deliver consistent revenue for a long time. Since the U.S. National Defense Strategy prioritizes missile development and defense, something LMT excels in, the company is poised for strong future growth in the years ahead. LMT also enjoys strong demand for its military equipment in international markets, which also aids growth.
LMT has an overall grade of B or a Buy rating in our POWR Ratings system. The company has a Value Grade of B with a trailing P/E of 15.99 and a forward P/E of 14.88. LMT also has a Quality Grade of B, which means it has a healthy balance sheet. As of the end of the year, LMT had $3.2 billion in cash, compared with only $500 million in short-term liabilities.
For the rest of LMT’s grades (Growth, Momentum, Stability, and Sentiment), click here. LMY is ranked #14 in the Air/Defense Services. For more top stocks in the industry, make sure to click here.
CVS Health Corporation (CVS)
CVS is one of the largest healthcare companies in the U.S., providing retail, mail, and specialty pharmacy dispensing services and pharmacy benefits. After it acquired Aetna, it became one of the most vertically integrated publicly-traded healthcare companies in the world. The company has been benefiting from the vaccine rollout. When a customer goes to CVS to get their free vaccine, they are likely to purchase other items after getting their shot.
While the company’s integration with Aetna will certainly provide more free cash flow, I am more bullish on its efforts to expand its offerings in its stores. I believe it's HealthHUB concept could be a game-changer. While many of its stores already offered a MinuteClinic, HealthHub will add care concierges, nurse practitioners, and dietitians to its offerings saving consumers a trip to the hospital and providing a one-stop-shop health center.
CVS is rated a Buy in our POWR Ratings system. The company has a Value Grade of A, with a forward P/E is only 10.09, and its Price to Sales is only 0.4. The company also had a Sentiment Grade of B, as it is well-liked by analysts. Twenty out of twenty-eight analysts rate the stock a Buy or Stock Buy. We also provide Growth, Momentum, Stability, and Quality grades for CVS. You can find them here.
CVS is ranked #1 in the Medical – Drug Stores industry. For more top-ranked stocks in this industry, click here.
Cigna Corporation (CI)
CI provides pharmacy benefit management and health insurance services. It is one of the largest managed care organizations and pharmacy benefit managers in the country. Its pharmacy benefit services were vastly expanded with its 2018 merger with Express Scripts. The company provides health insurance to employers through self-funding arrangements but also operates in government programs.
CI’s approach to grow and cut costs has proven fruitful as its revenues have been growing consistently over the last few years. CI reduced its debt level and streamlined operations by divesting its Group Life and Disability insurance business. The company is also reducing medical cost growth which should help CI attract more business from existing and potential clients. Its expanding international business also aids growth.
The company has an overall grade of A, which translates into a Strong Buy Rating in the POWR Ratings system. It also has a Growth Grade of B, which makes sense as earnings were up 70.8% over the past year. EBITDA was also up over the past year as it rose 49.1%. The stock also has a Value Grade of A due to its low valuation. Its trailing P/E is quite low at 11.00, while its forward P/E is also low at 12.48.
We also grade CI based on Momentum, Stability, Sentiment, and Quality. You can find those grades here. CI is ranked #1 in the B-rated Medical – Health Insurance Industry. You can find other top stocks in that industry by clicking here.
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SNY shares were trading at $51.94 per share on Tuesday afternoon, up $0.12 (+0.23%). Year-to-date, SNY has gained 6.89%, versus a 10.52% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.
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