We recently published a list of 7 Most Profitable Cheap Stocks To Invest In. In this article, we are going to take a look at where Merck & Co. (NYSE:MRK) stands against the other most profitable cheap stocks to invest in.

Insights on Small Caps, Tech, and More

Sherry Paul, Morgan Stanley Private Wealth Management managing director, joined CNBC’s “Squawk Box” on October 8, to discuss her investment strategy amidst the current market trends. Despite the Russell 2000 being down a percent, Paul believes it’s the right time to strategically add to small caps, as they are ripe for M&A and have been teased out due to their dependence on domestic consumption.

Paul emphasizes that the key to navigating this market is to be selective and strategic, recommending a broadening out of investments across sectors in the S&P, with a focus on large caps, particularly in areas such as industrials, financials, and staples. She believes that the rates going lower, combined with the productivity-enhancing cost reduction kicker, will benefit these sectors. Paul also highlights the importance of dividend yields, which can add lower volatility to a portfolio.

Regarding large-cap tech stocks, Paul remains bullish, viewing it as a theme rather than an idea. She believes that corporations will invest in software and hardware upgrades, driven by their enormous cash balances and the need to cut costs as rates go lower. This will be a boost for the sector, although it’s a longer-term game, with a time horizon of 12-24 months.

Despite the S&P 500 near record levels, Tom Lee, co-founder of Fundstrat, an independent equity research firm, remains bullish, citing a strong economic backdrop, the Fed’s decision to cut rates, and stimulus policies in China as tailwinds that will support the market. He believes that the economy is resilient and that the Fed’s easing will lead to a continued bull market, with the S&P 500 potentially reaching 5700 or higher by the end of the year.

Lee acknowledges that there are some headwinds, including the looming election and rising oil prices, but believes that they will be offset by the tailwinds. He also notes that small caps, which have been the weakest area of the market since the Fed hike, are due for a rebound.

As the market continues to navigate through economic trends and global challenges, expert insights help provide valuable insights to make informed investment decisions.

Our Methodology

To compile our list of the 7 most profitable cheap stocks to invest in, we used the Finviz and Yahoo stock screeners to compile an initial list of the 40 largest companies by market cap that are trading at a forward P/E ratio of under 20 as of October 7. From that list, we narrowed our choices to 7 stocks with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha, which provided insights into 5-year growth rates, and Macrotrends, which supplied information on trailing twelve-month (TTM) net income. Then we sorted the stocks in ascending order, according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Merck & Co. (NYSE:MRK)  

Number of Hedge Fund Holders: 96  

Forward P/E Ratio as of October 7: 13.51  

TTM Net Income: $13.73 Billion  

5-Year Net Income CAGR: 7.97%

Merck & Co. (NYSE:MRK) is a multinational pharmaceutical company that has been a leader in the industry for over 125 years. The company focuses on delivering innovative, life-changing medicines and vaccines, and has established itself as one of the world’s largest and most successful pharmaceutical companies.

In Q2, Merck & Co.’s (NYSE:MRK) revenue increased to $16.11 billion, up 7.1% year-over-year, and its earnings per share (EPS) was $2.28, up 10.1% quarter-over-quarter. The strong results were driven by the company’s pharmaceutical segment, which accounts for 89.4% of its revenue. The segment’s total sales were $14.41 billion, up 7.1% year-over-year.

Merck & Co.’s (NYSE:MRK) oncology portfolio was a major contributor to its success, with sales of $8.05 billion, up 16.4% year-over-year. Keytruda, the company’s PD-1 inhibitor, was a significant driver of this growth, with sales of $7.27 billion, up 15.9% year-over-year. The medication has been approved for 40 indications in the US and is expected to continue to drive growth for the company.

Merck & Co.’s (NYSE:MRK) vaccine franchise also performed well, with sales of $3.51 billion, up 7.6% year-over-year. The company’s Gardasil and Gardasil 9 vaccines, which protect against human papillomavirus, were major contributors to this growth, with sales of $2.48 billion, up 10.2% quarter-over-quarter. The company’s cardiovascular franchise also saw significant growth, with sales of $248 million, up 86.5% year-over-year, driven by the FDA’s approval of Winrevair for the treatment of pulmonary arterial hypertension.

Merck & Co.’s (NYSE:MRK) Winrevair is the first and only activin signaling inhibitor therapy approved for Pulmonary Arterial Hypertension (PAH), a serious and debilitating condition that affects millions of people worldwide, in all 27 member states of the European Union, as well as Iceland, Liechtenstein, and Norway. Winrevair is expected to continue to drive growth for the company.

Merck & Co. (NYSE:MRK) is also progress in developing its pipeline of vaccines and experimental drugs, including the publication of encouraging data from a Phase 3 clinical trial evaluating the efficacy of Clesrovimab in protecting infants against respiratory syncytial virus disease, which will also drive growth for the company.

Merck & Co.’s (NYSE:MRK) forward P/E ratio of 13.51indicates a 36.97% discount compared to the sector median of 21.44, the company’s net income for the twelve months ending June 30, was $13.73 billion, a staggering 341.53% increase year-over-year and a 5-Year net income compound annual growth rate (CAGR) of 9.97%. Analysts forecast the company’s earnings will increase by 136.62% this year and are extremely bullish on the company’s stock price, with a consensus Buy rating at a target price of $139.86, which implies a 24.10% increase from its current levels.

Overall MRK ranks 2nd on our list of most profitable cheap stocks to invest in. While we acknowledge the potential of MRK as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MRK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.