This past May, the Dow Jones Industrial Average (DJINDICES:^DJI) celebrated its 125th anniversary. Even after more than a century, the index, made up of 30 multinational companies, remains a key barometer of the stock market’s health.
The Dow Jones also happens to be home to some serious value stocks. Although historically-low interest rates allowed growth stocks to dominate in the past decade, value stocks have the higher average annual return over the ultra-long-term. If you’re looking for a smart place to put your money to work in November, the following three Dow stocks are screaming buys.
Shares of Merck were clobbered last week after rival Pfizer (NYSE:PFE) announced that an oral antiviral pill cut the risk of hospitalization or death in patients at risk of severe coronavirus disease by 89% when given within three days of symptom onset, and by 85% when given within five days. This is noteworthy given that Merck announced five weeks before that an oral antiviral of its own reduced the risk of hospitalization or death by 50% when given five days after symptom onset. While no concrete comparisons can be made between the two oral antivirals, Pfizer’s initial data readout appears more impressive.
But what investors need to understand is that a COVID-19 treatment isn’t necessary for Merck’s valuation to expand. Any additional sales would just be the icing atop a very delicious cake that comes from three factors.
First, cancer immunotherapy Keytruda is an absolute stud. Sales of Merck’s leading cancer therapeutic surged to $4.53 billion in the September-ended quarter, which works out to an $18 billion annual run-rate. Excluding COVID vaccines, this would put Keytruda on track to be the second-best-selling drug in the world. With Keytruda being examined in dozens of clinical trials, label expansion opportunities and organic growth potential remain robust.
Second, Merck is leaning on inorganic growth to do some heavy lifting. The company recently announced its intent to acquire Acceleron Pharma (NASDAQ:XLRN) in a cash deal valuing the company at $11.5 billion. The prize of the Acceleron buyout is late-stage therapeutic sotatercept, which is administered as an add-on drug to improve outcomes for patients with pulmonary arterial hypertension. Though estimates vary, sotatercept should offer $1 billion to $2 billion in peak annual sales potential.
Third, Merck’s animal health segment is an absolute beast. Year-over-year sales growth is consistently in the double digits, with revenue for companion animals leading the way.
Sporting a forward price-to-earnings (P/E) ratio of 11 and a market-topping 3.2% yield, Merck is a bona fide steal.
A second Dow stock that’s a screaming buy in November for patient investors — I repeat, patient investors — is IBM (NYSE:IBM).
To say that IBM has been left in the dust by tech stocks over the past decade would be a bit of an understatement. Big Blue waited far too long to invest in cloud computing and has paid the price for its tardiness. Sales for the company’s legacy operations have been in a persistent decline, which has in turn weighed down its sales and earnings growth potential.
However, IBM looks nearer to the light at the end of the tunnel than it’s been at any point over the past decade. The key measure that should excite investors is its cloud growth. Despite regularly reporting flat or declining year-over-year sales, cloud revenue keeps moving higher. Over the trailing 12 months ended in September, cloud sales totaled $27.8 billion, which is up 14% from the year-ago period. Since cloud margins are considerably higher than the margins for its remaining legacy operations, even relatively flat sales can lead to an expansion in operating cash flow.
To add to this point, IBM’s approach to the cloud should be highly successful in a pandemic and post-pandemic environment. Management has chosen to focus on the hybrid cloud, which combines public and private cloud services, allowing for data and applications to be shared between services. With workforces going mobile, demand for big-data projects and remote access to cloud networks should bolster IBM’s hybrid-cloud appeal.
Management has also made it a point to reward long-term investors. The company’s shareholder yield — i.e., the total capital returned to shareholders via dividends and net share buybacks over a 12-month period, relative to a company’s market cap — has averaged around 6% over the past decade. In fact, IBM’s dividend yield of 5.3% is four times higher than the yield of the S&P 500.
Like Merck, investors can gobble up shares of IBM for 11 times next year’s estimated earnings, according to Wall Street. Though its turnaround is still in progress, long-term investors should be rewarded with a hearty dividend for their patience.
Walgreens Boots Alliance
The third and final Dow stock that’s a screaming buy in November is pharmacy chain Walgreens Boots Alliance (NASDAQ:WBA).
The reason Walgreens is so inexpensive has to do with the negative impact of COVID. Since people don’t get to choose when they get sick or what ailment(s) they develop, the demand for drugs, devices, and healthcare services remains steady in any economic environment. But unlike most healthcare stocks, Walgreens’ bottom line was hit by COVID. Since it relies on foot traffic for the lion’s share of its sales, various lockdowns tangibly hurt its front-end sales and clinic revenue.
The good news is that rising vaccination rates should put COVID concerns firmly in the rearview mirror. This will allow the company’s multipoint turnaround plan to shine through.
As you might imagine, cost-cutting is on the list. Initially, management was targeting $2 billion in annual cost savings by the end of fiscal 2022. However, Walgreens has already hit the mark with more than $2 billion in expenses reduced by the end of fiscal 2021.
Then again, it’s not just about trimming the fat. Management is freely spending in higher-growth areas. For example, no expenses are being spared when it comes to digitization. The pandemic has shown how important it is for Walgreens to have an online presence. Even though its brick-and-mortar stores will drive the bulk of its sales, direct-to-consumer and drive-thru pickup can offer sustainable double-digit growth potential.
Perhaps the most exciting growth initiative is its partnership with VillageMD. The duo has opened more than 50 co-located full-service clinics so far, and plans to have more than 600 operational in over 30 U.S. markets by 2025. The differentiating factor for these clinics is they’re physician-staffed. Rather than catering only to vaccines and sniffles, Walgreens and VillageMD can court regular clientele with full-service clinics. This grassroots approach should improve brand loyalty and help funnel prescriptions right to Walgreens’ high-margin pharmacy.
Opportunistic investors can scoop up shares of Walgreens Boots Alliance for less than 10 times Wall Street’s estimated forward P/E, and they’ll be rewarded with a 3.8% dividend yield while they patiently wait for Wall Street to come to its senses.
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.