S&P 500 Bear Market: 3 Amazing Deals for Sick Investors
It’s official. As of midday on May 20, 2022, the standard Standard & Poor’s 500 (^ GSPC 0.95%) It has fallen more than 20% from its all-time close in early January, putting the widely followed indicator in a bear market.
There is no denying that bear markets can pull the sentiment of investors and create amazing price moves in a single session. Uncertainty about not knowing how far the market could fall, or precisely how long a bear market could last, tends to feed these investor fears.
However, history is a two-sided coin. Although market corrections are an inevitable part of the investing cycle, the data shows that they are usually resolved quickly. Most importantly, every noticeable decline in the broader market throughout history has been eventually erased by a bull market rally. Put in another context, every bear market has represented an opportunity for impatient investors to lure big companies on the cheap.
With the S&P 500 plunging into a bear market, a number of amazing deals have emerged for impatient investors.
The first normal deal for impatient investors is the giant money center American bank (buck 0.53%)which lost about a third of its value in just over three months.
The biggest concern for banking stocks of all sizes is that a recession may be on the horizon, or may already be here, as evidenced by the 1.4% GDP correction for the US in the first quarter. Banks are cyclical in nature, which means that an economic downturn typically leads to increased loan arrears and reductions.
But the funny thing about cyclical work is that she enjoys spending much more time in the sun than under a cloud of uncertainty. While recessions are inevitable, they usually only last for four quarters. By comparison, economic expansions can last for many years. Buying shares of banks such as Bank of America allows investors to benefit from the long-term growth of the US economy.
What really sets Bank of America apart and makes it, in my view, the biggest bank to own right now is its interest rate sensitivity. No financial center bank will see its net interest income fluctuate more than Bank of America as a result of interest rate yield curve movements. This is noteworthy in light of the Fed’s monetary policy shift emphasizing sharp increases in interest rates to combat historically high inflation.
In other words, the company is set to make higher profits from the existing variable rate loans without doing any extra work. According to BofA, a parallel 100 basis point shift in the interest rate yield curve would generate an estimated $5.4 billion in net interest income over the next 12 months.
Existing and potential investors should appreciate Bank of America’s investments in digitization. The company finished the first quarter with 42 million active digital users, and saw the percentage of completed online or in-app sales rise to 53% from 30% in just a three-year period. Since digital transactions are much cheaper for BofA than in-person or phone-based interactions, it has allowed the company to consolidate some of its subsidiaries and improve its operational efficiency over the course of several years.
Even with short-term headwinds, Bank of America looks like a great deal for long-term investors at nearly 8.5 times Wall Street’s earnings forecast for the year ahead.
Walgreens Boots Alliance
Another amazing deal that stands out from the crowd as the S&P 500 plunges into a bear market is the drugstore chain Walgreens Boots Alliance (WBA 0.90%).
Over the past two years, Walgreens has taken a double whammy. First, the COVID-19 shutdown has drastically reduced foot traffic to its stores, hurting front-end retail sales and clinic revenue. The company is now hampered by historically high inflation, which tends to weigh heavily on lower-income consumers. This could have a negative impact on the company’s retail sales in the upcoming quarter(s).
However, neither of those issues are a long-term deterrent to Walgreens Boots Alliance’s growth strategy — and that’s what counts.
Management is currently in the midst of implementing a multi-year transformation strategy designed to boost the company’s operating margins, increase its organic growth rate, and position it to improve engagement at the grassroots level.
First of all, Walgreens cut annual operating expenses by more than $2 billion. What’s more, I did it a full year ahead of schedule.
However, while the company was preoccupied with cutting costs in certain areas, it was willingly spending on various digitization initiatives. In particular, the pandemic has been a wake-up call that investing in online retail sales is a must. Although physical Walgreens stores will continue to generate the bulk of sales and engagement, having direct-to-consumer channels and/or providing convenient in-car transportation is an easy way to achieve sustainable organic growth.
But as a Walgreens shareholder, I am most pleased with the company’s full-service clinic initiative. Walgreens has partnered with, and is a majority investor in, VillageMD, with the goal of having 1,000 full-service clinics, co-located, in more than 30 US markets by the end of 2027. More than 100 of these clinics are already open. Being staffed with a medical team, these clinics are expected to encourage more frequent/regular visits, as well as reignite growth in the higher margin pharmacy.
Although I don’t deny the existence of headwinds, it seems to be quite hidden away. With Walgreens valued at only 8 times projected earnings for fiscal 2022, as well as yielding a 4.7% dividend yield, it seems ripe for selection.
The third amazing deal with the S&P 500 plunging into a bear market is a niche biotech stock Jazz Pharmaceuticals (Jazz 3.52%).
While there are concrete reasons for the declines in Bank of America and Walgreens Boots Alliance, trying to understand the 23% decline in Jazz Pharmaceuticals from a 52-week high is difficult. The best guess I can muster is that rapidly rising interest rates reduce access to cheap capital, and Jazz has been known to rely on the debt market to make acquisitions.
One of the best things about healthcare stocks is that they are generally defensive. No matter how high or low the S&P 500 goes up in a day, week, or month, people will still get sick and need medical attention. This means drug developers such as Jazz, medical device makers and healthcare providers can expect a basic level of demand in any environment.
Jazz’s best-known for its Oxybate franchise, which consists of the brand-name drugs Xywav and Xyrem. These treatments treat sleep disorders, such as narcolepsy. Jazz has thrived for years due to the amazing pricing power it has with Xyrem. However, the company’s future revolves around Xywav.
What makes Xywav special is its composition. Contains 92% less sodium per night dose than previous generation Xyrem treatment. High sodium levels can lead to a number of complications for Xyrem patients who have heart problems. With this new generation of drug working just like Xyrem, the company will have no problem switching patients to Xywav over time. To add, this is also a clever way for Jazz to secure exclusivity and core cash flow for a long time to come.
Another exciting preservative ingredient for jazz is Epidiolex, a cannabidiol-based drug approved to treat two rare forms of childhood epilepsy. Epidiolex came into the fold when Jazz acquired GW Pharmaceuticals for $7.2 billion in May 2021. Epidiolex has expansion opportunities on the horizon, and could eventually blossom into a treatment that generates more than $1 billion in annual sales.
To keep up with the topic of this list, impatient investors can buy Jazz Pharmaceuticals for just over 8 times expected earnings in 2022 and 2023. This is a great deal for a company whose revenue stock continues to rise.