We recently compiled a list of the 10 Most Undervalued Quality Stocks To Buy According To Analysts. In this article, we will look at where Merck & Co. Inc. (NYSE:MRK) ranks among the most undervalued quality stocks to buy according to analysts.
Are More Rate Cuts Necessary to Maintain The Current Economic Trajectory?
Despite global uncertainties, the US economy is viewed as stronger than its international counterparts. But then again, market challenges are undeniably persisting, and strategists are inclining toward one opinion or the other to help investors build a stronger portfolio for the rest of the year.
In such volatility, quality stocks with reliable earnings offer potential opportunities for risk-averse investors. Interest rates are currently high, but there is potential for significant gains if they decline. As current economic indicators support a favorable environment for growth and income generation, we covered a conversation from CNBC in our 10 Best Quality Stocks to Buy According to Analysts article, where the Global Investment Strategist at ProShares Advisors, Simeon Hyman, emphasized ‘income’ as a key focus, highlighting that fixed-income markets could provide 10-15% returns if geopolitical tensions worsen. Here’s an excerpt from that article:
“…the yield on the 10-year bond is nearly 4%, and there is potential for it to drop to 3% or lower if significant negative events occur. This scenario presents an opportunity for investors to realize gains of 10% or 15% on bonds in a tumultuous environment, a situation not seen in over a decade.
Despite the current market being down by 3.7%, which is slightly less than 4%, Hyman insisted that rounding was at play… there has been a 50-basis point cut and indications of a soft landing for the economy. A month-over-month increase of just 0.1% suggests that if one can overlook geopolitical issues, the US economy is faring better than many others globally and remains on solid economic footing.”
Richard Fisher, Jefferies’ senior advisor, joined ‘Closing Bell’ on CNBC on October 1 to discuss the Fed’s recent rate cut and what it means for the market from here. The former Dallas Fed Chair Richard Fisher shared his insights on the current state of monetary policy and the Fed’s approach to interest rate cuts, noting that he was not surprised by Chair Powell’s signals indicating smaller rate cuts are forthcoming. Fisher explained that he had been bullish since the end of 2023, despite initially predicting a recession that did not materialize. He emphasized the importance of measured cuts, stating that the Fed is looking at monetary policy with a long-term perspective, roughly 18 months out.
He highlighted the significance of recent economic data, particularly from the Atlanta Fed, which indicates strong growth above 3%. Fisher characterized the current economic environment as experiencing neither a soft landing nor a hard landing, but rather a smooth glide path. He believes that two more quarter-point cuts would be appropriate to maintain this trajectory. When discussing concerns about whether current rates are too restrictive relative to inflation, Fisher disagreed with the argument and pointed out that financial conditions remain accommodative, citing narrow spreads and strong private lending activity. He argued that with another two cuts, the Fed would not be overly restrictive.
Despite acknowledging Powell’s effective leadership, Fisher maintained that it was premature to declare victory regarding economic stabilization. He believes Powell’s term will continue until April 2026, and only then can a true assessment of success be made. Overall, Fisher’s emphasis on measured rate cuts and ongoing economic strength underscores the delicate balance policymakers must maintain in fostering growth while managing inflationary pressures.
This could have a positive impact on the stock market, especially for undervalued quality stocks. When interest rates fall, investors often shift their focus to equities as they seek higher returns. This could lead to increased demand for undervalued quality stocks, potentially driving up their prices. In that context and given Fisher’s cautious optimism, we’re here with a list of the 10 most undervalued quality stocks to buy according to analysts.
Methodology
To compile our list, we first sifted through Vanguard U.S. Quality Factor ETF holdings to find the ones with an upside potential of over 15% as of October 7, 2024. We then selected stocks with a forward P/E ratio under 15 and made a list of 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.
Why are we interested in the stocks that hedge funds pile into? 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)
Average Upside Potential: 27.54%
Forward Price-to-Earnings Ratio: 10.96
Number of Hedge Fund Holders: 96
Merck & Co. Inc. (NYSE:MRK) is a global healthcare company that delivers innovative health solutions through its prescription medicines, vaccines, biological therapies, and animal health products. It has a strong focus on research and development, and its products are used to treat a wide range of diseases, including cancer, infections, and cardiovascular disorders.
Earlier this year, its revenue grew 7.16% in Q2 2024, driven by growth in all business segments. Human Health grew 11%, Animal Health grew 6%, and KEYTRUDA sales rose 21%. Vaccines like GARDASIL and VAXNEUVANCE grew by 4% and 16%, respectively. However, the expiration of KEYTRUDA’s patent in 2028 could impact future growth.
It received FDA approval and ACIP recommendation for its new pneumococcal conjugate vaccine, CAPVAXIVE, for adults. The WINREVAIR vaccine for adult patients with pulmonary arterial hypertension was also approved and generated $70 million+ in sales during the quarter. The company acquired Elanco’s aqua business to become a leader in animal health and acquired EyeBio in July to enter the ophthalmology market and develop treatments for retinal conditions.
On October 1, the company completed the acquisition of CN201, a bispecific antibody for the treatment of B-cell-associated diseases. CN201 is currently being investigated in clinical trials for NHL and ALL. Merck & Co. Inc. (NYSE:MRK) recorded a pre-tax charge of ~$750 million related to the acquisition, which will be included in Q3 non-GAAP results.
It’s poised for continued growth due to its international expansion, diverse drug portfolio, and strong financial results. The acquisition of Harpoon Therapeutics is expected to strengthen its oncology pipeline and create opportunities for new combination therapies. Hence, Merck & Co. Inc. (NYSE:MRK) is rather well-positioned for success.
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 most undervalued quality stocks to buy according to analysts. While we acknowledge the potential of MRK as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high 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 on Insider Monkey.
