For more than a decade, growth stocks have ruled the roost on Wall Street. That’s because fast-growing companies have been basking in perfect conditions. The Federal Reserve has stood by historically low lending rates, and its monthly bond-buying program is helping to keep long-term yields low. This has allowed growth companies to borrow at incredibly cheap rates.
But pan out a bit further, and you’ll see a history when value stocks thrive.
Back in 2016, Bank of America/Merrill Lynch released a report that examined the performance of value stocks versus growth stocks over a 90-year stretch (1926-2015). The result? Value stocks delivered the higher average annual performance (17% vs. 12.6%). What’s more, they performed significantly better during the early stages of an economic recovery, which is where we are now.
In other words, if you’re looking to build wealth over time, the following trio of value stocks could be just what you need to get richer in June, and well beyond.
Sometimes, the reason value stocks are so intriguing is because they also qualify as growth stocks. That’s the case with specialty biotech stock Vertex Pharmaceuticals (NASDAQ:VRTX).
Whereas most value stocks have been on fire over the trailing year, Vertex has struggled mightily. Shares of the company are down 28% over the trailing year, representing a 66 percentage-point underperformance to the benchmark S&P 500.
Much of this can be blamed on a mid-October update that announced the discontinuation of a phase 2 trial involving experimental drug VX-814. While this update was disappointing, Wall Street and investors seem to be overlooking an abundance of positives.
For example, Vertex has developed multiple generations of approved treatments for cystic fibrosis (CF), a genetic disease characterized by thick mucus production that can obstruct the lungs and pancreas. There’s no cure for CF, but Vertex has cracked the code, per se, to helping improve lung function for patients.
The company’s newest drug Trikafta targets the most common CF mutation and was approved in 2019 five months ahead of its scheduled review date with the Food and Drug Administration. It brought in close to $3.9 billion in sales last year and will likely top out at or above $6 billion in annual sales.
Furthermore, Vertex is sitting on a boatload of cash — $6.92 billion, to be precise. This capital will allow Vertex to advance the roughly one dozen experimental compounds in development and could be the catalyst for future acquisitions to diversify its revenue stream.
Value investors can scoop up Vertex right now for a forward-year price-to-earnings ratio of under 17. That’s exceptionally inexpensive given its sustainable double-digit sales growth.
There may not be an industry that’s jam-packed with more value stocks at the moment than gold mining. Gold stocks spent the early part of the 2010s piling on debt and the second-half of the decade paring down their borrowing capacity. As a result, many now have favorable multiples relative to their cash flow. One such company that’s bound to raise some eyebrows among value investors is Yamana Gold (NYSE:AUY).
There can be no discussion of gold stocks without first tackling the catalysts that could push the underlying lustrous yellow metal higher. The Fed’s dovish monetary policy, its ongoing quantitative easing, and even the future prospects of inflation are all reasons gold can maintain or advance from its current levels. That’s great news for any mining stocks producing gold.
But there’s a lot more to like about Yamana than just “gold prices will probably head higher.” For instance, Yamana has done a bang-up job of improving its balance sheet over the past five years. For a company that once had $1.7 billion in net debt, Yamana ended the first quarter of 2021 with a little over $300 million in net debt.
The company has also seen production improvements at key mines. The company’s flagship Canadian Malartic mine, which is owned 50/50 with Agnico Eagle Mines, produced nearly 90,000 ounces of gold in the first quarter, up significantly from the 64,763 ounces produced last year in Q1. There’s also the ramp-up of Cerro Moro, whose added gold and silver production should help Yamana reach 1 million gold equivalent ounces of production on an annual basis for many years to come.
In my more than a decade of following gold stocks, I’ve come to the conclusion that a multiple of 10 times cash flow is a fair valuation. At just six times future cash flow, Yamana remains a bargain.
A third value stock that can make you richer in June and beyond is chipmaker Broadcom (NASDAQ:AVGO). Yes, there really is value in the tech sector.
The bulk of Broadcom’s revenue is derived from supplying wireless chips and other accessories in smartphones. It’s certainly a lucrative time to be a key supplier of smartphone chips, given the ongoing upgrades to 5G infrastructure. It’s been a decade since the last major upgrade to download speeds, which means Broadcom should see a sustainable multiyear uptick in demand as businesses and consumers swap out their devices to take advantage of faster wireless speeds.
Broadcom also stands to benefit from the continued push of data into the cloud by businesses. Prior to the pandemic, most businesses were somewhat steadily shifting their presence online. But since the coronavirus pandemic struck, businesses have had no choice but to beef up their online presence and move data into the cloud to make it accessible to employees. This implies a growing demand for data center storage. That’s great news for Broadcom, which manufactures an array of connectivity and access chips used in data centers.
If this isn’t enough to get you excited, Broadcom’s CEO Hock Tan announced in March (i.e., pretty early in the company’s fiscal 2021) that approximately 90% of its chip supply for the year had already been ordered. With demand this robust, Broadcom should have no issue growing its top and bottom lines.
Investors can currently buy shares of the company for 16 times forward-year earnings, all while pocketing a 3% dividend yield in the process. I should also mention that Broadcom’s payout has grown from $0.07 a quarter to $3.60 a quarter in only 10 years.
This is a top-notch company at a very reasonable price.
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.
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