After a particularly difficult end to last year, stocks have been soaring so far in 2019 and the market has had one of its best starts for a year on record.
While this rally looks like good news for investors, there aren’t a lot of bargains to be found. However, there are two interesting bets still out there for smart value investors to take advantage of.
Here’s what you need to know about these two stocks.
Allergan (NYSE: AGN)
If you’re looking at price-to-book value, Allergan (NYSE: AGN) looks like one of the cheapest large-caps with a price-to-book of just 0.74.
This global biopharma giant—you may know it for its aesthetics treatment, Botox—has taken a beating since Pfizer (NYSE: PFE) abandoned its $160 billion plan to merge with Allergan in 2016. Shares are now trading at half of what they were in 2015 as the company struggles to differentiate itself from its biopharma peers.
But that’s not the only reason shares have been in free-fall. The company has taken on a massive debt pile in the last few years after acquisitions that it has relied on to fuel growth. In 2015, Allergan acquired Actavis, pushing its debt to over $40 billion. The company then sold its generics business to Teva Pharmaceuticals (NYSE: TEVA) for $34 billion and 100 million Teva shares—which Allergan has since sold—however, debt still sits at around $24 billion, with interest totaling $900 million per year.
Beyond that, Allergan has had an absence of new products and several pipeline failures. Its latest failure came just last month when a late-stage trial of a depression drug—which had been acquired via the $560 million acquisition of Naurex in 2015—failed to show a significant benefit compared to placebo. The depression treatment was one of six blockbuster drugs that Allergan had previously touted as future revenue drivers.
The company is also now facing competition with its best seller, Botox, which is now running up against a similar treatment for frown lines from Evolus. Allergan’s absence of new products has also contributed to shrinking sales and profits, especially after the company faced pushback for raising prices on its existing products. In Q4, the company reported a year-over-year decline in revenue of 5.7%, and adjusted earnings per share fell 11.7% to $4.29.
But it’s not all bad news with Allergan, and there may be value worth buying. The company produced in excess of $5.7 billion in net income in 2018, and is guiding for adjusted EPS of $16.36 in 2019. It also has a new migraine drug that could gain FDA approval in the next 10 months, and its treatment for wet age-related macular degeneration is expected to be filed with the FDA soon. Allergan also has a treatment for nonalcoholic steatohepatitis (NASH) in its pipeline and data is expected for it in 2020, which could spark investor excitement.
Analysts’ current price target for this bargain-bin stock is $191.17, suggesting possible upside of 31.8% over the next twelve months. Last month, JPMorgan Chase reiterated their Overweight rating on the stock and set their price target at $200 – 38% higher than Thursday’s closing price.
CVS Health (NYSE: CVS)
There’s cheap, and then there’s dirt cheap.
From a valuation perspective, CVS Health (NYSE: CVS) has a forward price-to-earnings multiple at a mere 7.4X. It also offers an attractive dividend of 3.71%.
The stock has been under pressure in the last few years as powerful new names have entered the pharmacy space—including Amazon (NASDAQ: AMZN)—and competition from Walgreens (NASDAQ: WBA) has increased. There’s also the ongoing threat of Washington passing prescription drug reform that would reduce drug prices and limit pharmacy margins.
CVS has been changing a lot over the last few years. It recently completed its $70 billion acquisition of health insurance company Aetna. The acquisition was a smart move as Aetna offers stronger organic growth than CVS’s core operations, and it brings 23 million insured members into the CVS fold that the company could keep within its pharmacy business, which would in-turn boost customer loyalty.
In a note to clients, SunTrust Bank analyst David MacDonald said that while he expects 2019 to be a difficult year for CVS, “we remain positive on CVS’ underlying value proposition tied to its integrated pharmacy/medical benefits, unique set of assets, meaningful patient touch points, and strong clinical programs, and view the company as well positioned to bend the cost curve over time.”
“We also expect strong Medicare Advantage growth and expect the Healthcare Benefits division to benefit as acquisition synergies are realized,” MacDonald wrote. “While we expect 2019 performance to remain choppy, we continue to like the risk/reward, given the meaningful expected cost savings benefits, strong cash flow generation and discounted valuation.”
The long-term thesis for CVS is as strong as ever. There are currently 16 Buy ratings for CVS and analysts’ average price target for the stock is $80.38, indicating possible upside of 52.56% over the next twelve months. Morgan Stanley recently set their price target for the stock at $92 – 74% higher than the current price.