Signs that the stock market is expensive are all around us. For one, Warren Buffett’s favorite indicator — the ratio of total market capitalization of the stock market to gross domestic product — is at an all-time high. At 239%, it’s higher than it was the before the dot-com crash of 2001 and the global financial crisis in 2008. Those are the last two times it eclipsed 100%.
For a conservative choice, we asked three contributors to Fool.com to recommend a healthcare company that looked cheap in this expensive market. They chose CRISPR Therapeutics (NASDAQ:CRSP), Bristol Myers Squibb (NYSE:BMY), and Fulgent Genetics (NASDAQ:FLGT). Here’s why.
Differentiation through patient focus
Jason Hawthorne (CRISPR Therapeutics): Genetic medicine has become part of everyday dialogue now that a messenger RNA-based vaccine has helped curb a global pandemic. A different approach to hacking our biological instructions — gene editing — was discovered by two researchers nearly a decade ago and resulted in their receiving the 2020 Nobel Prize in Chemistry. The technology has made significant strides toward commercialization.
CRISPR Therapeutics is one of the companies that was founded with the initial gene-editing patents. It has spent the last several years developing a therapy to treat sickle cell disease and beta thalassemia — two genetic blood disorders. So far it has produced remarkable results, effectively curing patients with one albeit expensive treatment. The latest data from 22 patients who were followed for at least four months after treatment offers similar results. Management sold a controlling interest in the drug to its partner, Vertex Pharmaceuticals, for $900 million. It has bigger plans.
Having proven its approach works, CRISPR Therapeutics is focusing on its pipeline of cancer treatments for an immuno-oncology market estimated to be worth about $60 billion. Specifically, management wants to move its approach away from treatments that are derived from the patient to ones that are derived from healthy donors. By creating off-the-shelf treatments, the company could scale manufacturing and change the cost structure of treatment. It would also significantly expand the potential patient population. The company also has a pre-clinical program targeting type 1 diabetes. Despite the progress and opportunity, shares of CRISPR Therapeutics are down 45% from the high they set in January.
There is risk involved with investing in any single biotech, especially one without a product on the market. That said, gene editing in some form almost certainly represents the future of medicine. With a huge addressable market and an approach that has proven itself in human trials, investors looking for exposure to this burgeoning field of medicine might want to add this beaten-down stock to their portfolio.
A pharmaceutical giant and a top-paying dividend stock with plenty of room left to grow
Rachel Warren (Bristol Myers Squibb): Pharmaceutical giant Bristol Myers Squibb hasn’t delivered investors insane share price returns in recent years, and it’s not a stock that’s going to make you rich overnight. However, when you invest with a long-term buy-and-hold perspective, companies with a robust industry presence, strong competitive advantage, and dependable track record of growth can be attractive additions to a thriving portfolio.
Bristol Myers is such a stock. The company is one of the stalwarts of the pharmaceutical industry, with a long and respectable history of steady growth to back it up. Bristol Myers’ history as a company goes all the way back to 1858, when its founder, Dr. Edward Squibb, established his first laboratory in New York. The company became a publicly traded entity in 1929, just shy of a century ago.
Today, the company is known for its wide-ranging product portfolio of top-selling medicines, boosted by its 2019 acquisition of Celgene. These include products such as multiple myeloma drug Revlimid, blood thinner Eliquis, cancer drug Opdivo, and autoimmune drug Orencia. Product revenue from these four drugs alone increased by respective amounts of 11%, 29%, 16%, and 9% in the second quarter of 2021 compared to the year-ago quarter.
Bristol Myers’ total second-quarter revenue represented a 16% uptick on a year-over-year basis. And the company also generated net earnings of $1.1 billion in the second quarter as opposed to the $85 million net loss it recorded the same time last year. Looking at the broader picture, despite some years of mixed financial results, Bristol Myers has still increased its annual revenue by a whopping 100% over the past 10 years alone.
Right now, shares of Bristol Myers are only up about 11% from where they were trading about five years ago. On the flip side, it trades astoundingly cheap at right around $60 per share and has a price-to-sales ratio of just three. Investors who are in it for the long haul can take advantage of an incredible opportunity to buy this top healthcare stock for a real bargain, as its high-performing product portfolio continues to drive growth that can eventually translate to meaningful share price turns.
Where investors can realize more optimal returns from this stock both in the short and long term is in the form of its dividend. Yielding 3.3% at the time of this writing, Bristol Myers’ dividend is nearly twice that of the average stock on the S&P 500 index (1.3%). And the company has a solid history of increasing its dividend to boot. Over the past 10 years, the company has grown its its dividend by a little under 50%.
An expanding genetic testing business will drive long-term growth
Steve Ditto (Fulgent Genetics): In 2020, Fulgent Genetics saw its revenue increase more than 1,200% year over year as it delivered COVID-19 testing on a massive scale. As a result, Fulgent stock hit an all-time high of almost $190 in February 2021. Since then the stock price reversed and has fallen more than 50% as COVID-19 testing declined precipitously and management had difficulty forecasting revenue from ongoing testing.
The good news for investors is Fulgent has much more exciting future prospects than COVID-19 testing. Fulgent has a growing genetic testing business which management expects to generate revenue of $110 million in 2021, representing a 201% year-over-year increase. Fulgent’s impressive organic growth will be complemented through additional growth by acquisitions and partnerships as management uses the $777 million in cash on its balance sheet to expand and diversify the business.
In last year’s fourth-quarter conference call, Fulgent management discussed its interest in acquisitions. In the second quarter of this year Fulgent delivered on those intentions by completing several deals. Fulgent bought CSI Laboratories for its cancer testing business, made a $20 million investment in Helio Health for early cancer detection, and increased its $19 million majority stake in Chinese joint venture FF Gene Biotech for cancer testing in China.
Prior to these acquisitions, Fulgent had built its genetic testing business by focusing on pediatric diseases. The expansion into cancer testing opens up far larger markets both in the U.S. and internationally. The majority of clinical trials by pharma companies are for cancer. Fulgent’s cancer testing ambitions will be helped by those pharma companies that will push regulators to approve genetic testing and reimbursement since testing drives demand for their therapies and improves outcomes by matching patients to the best treatments.
The multi-cancer testing market is projected to become a $150 billion opportunity in the U.S. The opportunity in China is even larger with twice as many cancer cases as the U.S. These new markets will take time to develop but the potential for long-term sustainable revenue should make even the peak COVID-19-testing revenue seem relatively small in comparison.
Fulgent has operating margins above 60% and has proven to be very capable of operating the business in the face of rapid growth. Investors should have confidence Fulgent can assimilate and profitably grow these newly acquired businesses.
For patient long-term buy-and-hold investors with a tolerance for some near-term uncertainty, Fulgent Genetics may actually be a screaming buy and a great way to build your healthcare stock portfolio.
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.