We recently compiled a list of the 7 Cheap Beginner Stocks to Invest In. In this article, we will look at where Merck & Co., Inc. (NYSE:MRK) ranks among the cheap beginner stocks to invest in.

Does Fed Rate Cut Translate to a Higher Consumer Borrowing Trend?

The Federal Reserve has approved the interest rate cut of 50 basis points, which at least for the time being is turning out to be good for the stock market. The interest rate cut also means that businesses and consumers have received immediate relief, but is the public ready yet to jump out of their high inflation rate mindset?

According to a recent report by Reuters, even before the Fed announced a rate cut the financial markets had already begun making credit cheaper for consumers and businesses. Mortgage rates were slightly down, corporate bond yields were also cut, and day-to-day personal and auto loans were also eased. For instance, the average rate a person had to pay for a 30-year fixed home mortgage is 6% after decreasing 2 percentage points from a year ago. Moreover, as per Redfin, a real estate firm, the average median price of houses sold in the middle of September was $3,000 less than the all-time high prices in April and represented a 3% decrease year-over-year.  A recent survey shows that while inflation has come down significantly during recent times, the public mood is still distracted due to the past two years of high inflation.

In one of our recent articles, we talked about how the interest rate cut helps both growth and value stocks. However, the market trends show that the recent announcement is favoring growth stocks more than value stocks. Here’s an excerpt from the 10 Worst Affordable Stocks Under $10:

“It is true that interest rate cuts help both growth and value stocks, but which ones are doing better? The current market trend shows the interest rate cut expectation and the announcement supported growth stocks more than the value stocks and also resulted in small caps becoming new favorites.

Talking about value stocks and how the market could be entering into a slower growth period, Vahan Janjigian, Chief Investment Officer at Greenwich Wealth Management, and Margaret Patel, Senior Portfolio Manager for multi-asset solutions at Allspring Global Investments discussed this in a recent CNBC interview. Janjigian expressed his cautiousness regarding the market even after the Fed cut rates. He believes that interest rates will go up in the long term. It is because the market is eventually going to get a more normalized yield curve, which he believes is good for the economy. If the yield curve continues to follow the upward trajectory, it will favor value stocks more than growth stocks.

Stated that the market moves in the direction Janjigian expects, we can see a sell-off for the stocks that are currently moving higher, including the tech and growth stocks. Moreover, he also pointed towards some of the biggest investment risks. He mentioned that the rising deficit, debt, and cost of servicing the debt are some of the biggest threats. Debt is also one of the reasons interest rates could potentially go up in the future, as the debt grows it can potentially push the market-determined interest rate higher.”

Banks are considered value stocks, Gerard Cassidy, RBC Capital Markets managing director, thinks banks’ margins will open up as the Fed begins rate cuts.

On September 20, Cassidy appeared in a CNBC interview to talk about how banks are likely to perform in the current scenario. Gerard Cassidy has done some research on the 25-year banking history of the United States and has concluded that when the Fed cuts rates in a period of no recession, bank stocks tend to go up. He mentioned that in 1995 when the Federal Reserve cut the interest rates and the economy was not going into a recession, bank stocks went up 55%.

Cassidy believes deposits of the banks set them apart from any other company. When the Fed starts to cut rates, the funding cost of the banks comes down due to their deposits. Moreover, most banks have loans and bonds from 2021 and 2022 at extremely low yields, so these assets mature in a higher rate environment even as rates come down. Regardless of this, the funding rates come down faster resulting in higher margins for the banks.

The concept explained above hasn’t changed since the comparison period of 1995, thereby indicating that bank stocks could potentially benefit from rate cuts. Gerard Cassidy thinks the current market condition should result in higher net interest margins and net interest income for at least the top 20 banks.

Lastly, while talking about consumer borrowing behavior, Cassidy believes, we need a greater amount of cuts and the magnitude of easing has to come in. He thinks perhaps at least a 100 basis point will trigger some borrowing trend among the general public.

Our Methodology

To compile the list of 7 cheap beginner stocks to invest in, we selected the stocks of established companies that were the most widely held by hedge funds and are trading below a forward P/E of 15. The list has been ranked in ascending order of the number of institutional holders, as of Q2 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., Inc. (NYSE:MRK)

Forward P/E Ratio: 14.37 

Earnings Growth This Year: 433.80% 

Number of Hedge Fund Holders: 96 

Merck & Co., Inc. (NYSE:MRK) is a leading pharmaceutical company based in the United States that specializes in both Human health and Animal health. The company is and has been one of the favorite investments due to its high return rates. It has delivered more than 72% during the last 5 years, mainly due to its strong performance Keytruda immunotherapy drug, which is a standard care for various kinds of cancer.

Keytruda has proven to be a game changer for Merck & Co., Inc. (NYSE:MRK) with $26.3 billion in sales during the past year. The drug represents around 50% of the company’s pharmaceutical business. During the second quarter alone, its sales grew 16% year-over-year to reach $7.3 billion, while the overall sales of the company stood at $16.1 billion.

However, there is a slight twist to the story. Keytruda’s formulation patent for the company is set to expire in 2028, meaning Merck & Co., Inc. (NYSE:MRK) could lose its economic moat in a decade. Should you be concerned as an investor?

The concern can be valid as the cancer drug has been a significant winner for the company, however, management has been focused on advancing its pipeline and landing new approvals to diversify its portfolio.

It recently got its new medicine, a pneumococcal conjugate vaccine for adults approved by the FDA. Moreover, it launched another vaccine for patients with pulmonary arterial hypertension, which generated more than $70 million in sales from its approval in March to August, when the second quarter results were announced.

In addition, Merck & Co., Inc. (NYSE:MRK) has also been actively acquiring new businesses to expand its reach. Management, recently acquired EyeBio, helping the company progress with its retinal treatment medicines. Within the animal care segment, the company acquired Elanco’s aqua business.

The stock is also trading at a 34% discount to its sector, with earnings expected to grow by a staggering 433.80% during the year. Thereby justifying its inclusion among the best cheap beginner stocks to invest in.

Carillon Eagle Growth & Income Fund stated the following regarding Merck & Co., Inc. (NYSE:MRK) in its first quarter 2024 investor letter:

“After posting lackluster returns in 2023, Merck & Co., Inc. (NYSE:MRK) got off to a strong start in January by raising the long-term sales forecasts for its oncology and cardiology pipelines and reporting solid fourth-quarter results, coupled with strong financial guidance for 2024. Merck shares also finished the quarter strong after receiving U.S. Food and Drug Administration approval in late March for a new cardiology medicine with the potential to contribute significantly to sales growth over the next several years.”

Overall MRK ranks 2nd on our list of the cheap beginner 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 a promising AI stock 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 was originally published on Insider Monkey.