Green in the Red Zone: Why Bristol-Myers Could Jump 80% From Here
November may be coming to an end, but our Ultimate Income strategy is still working for us in this end-of-year period. We'll keep using it to sweep up instant dividends as we close out the year and move to take advantage of the "January Effect" in early 2024.
Welcome back to Green in the Red Zone. This is your latest Ultimate Income guide to strong companies whose stocks are currently sitting in the Red Zone, according to the TradeSmith Volatility Quotient (VQ) indicator, but deserve a closer look based on their performance and fundamentals.
As the Thanksgiving leftovers get finished off, I'm starting to look towards the December holiday season. I've found myself thinking about the Ozempic craze that rocked the "junk food" stocks earlier this year… and how its sibling drug Wegovy was approved by the FDA for weight loss earlier this month.
The healthcare and pharmaceutical sectors could be interesting plays as we shift into a recovery environment, as I mentioned in my 2024 sector forecast, so I spent some time looking through my research in the space earlier this week.
One pharma company stood out to me, well-positioned despite a few headwinds.
Today, we'll be stepping away from the consumer discretionary stocks we've been looking at for the past few weeks and taking a look at a different sector… and an old trade that might be worth revisiting next year.
Bristol-Myers Squibb: The Big Pharma Giant That Just Keeps Growing
Ultimate Income subscribers who've been with us for a while might remember our trade on Bristol-Myers Squibb Co. (BMY) from February. BMY is one of the highest-rated stocks in our system, with a Business Quality score of 96 and a Strong Bullish stock rating.
Early this year, we sold several cash-secured puts on the stock, but never ended up assigned with shares. After earning premium from a successful string of trades, Ultimate Income left BMY behind at the end of March, after it dropped out of the Yellow Zone early that month.
It's been in the Red Zone ever since, and it's down 32% year-to-date. What happened?
Well… along with a general slump in pharma stocks across the board, Bristol-Myers is staring down into what's called the "patent cliff," the period where a drug loses its patent protection and can be produced generically by other companies.
See, this blue-chip pharma giant is best known for their drugs Revlimid and Opdivo, both anti-cancer therapeutics, as well as the blood thinner Eliquis. But Revlimid's patents are set to expire over the next three years.
Meanwhile, the last two earnings reports have been mired with news about falling revenues from the drug as generic competition ramps up in Europe. At the same time, Eliquis was announced as one of the first 10 drugs to have its price negotiated down by a new Medicare pricing reform program. The treatments will be more accessible… but that's a serious hit to two of the company's flagship products.
But remember: that's only two of the company's products. While news of Revlimid's revenue drop may be drawing headlines, Bristol-Myers the company is still doing great even while the stock is under the weather.
Eliquis' pending price drop will likely turn its revenue growth negative next year, but the company's portfolio of new product offerings delivered a revenue growth of nearly 70% in Q3, as seen in the chart below. Chemotherapy drug Abraxane increased revenue by 47% that quarter as well.
The growth was made possible by Bristol-Myers' knack for making great acquisitions:
- They picked up the biotech company Celgene back in 2019 – which has spurred roughly 50% of EPS growth over the last four years.
- Just last month, the company finalized a deal to purchase Mirati Therapeutics (MRTX), which brings the company's lung cancer and oncology assets into its product portfolio.
With over $12 billion in free cash flow annually and a sterling new "A+" credit rating from S&P Global delivered last month, the company is positioned to snap up competitors and smaller companies with good prospects.
That should be more than enough to overcome the patent cliff issue… as well as any minor headwinds from the Ozempic and Wegovy weight-loss fads. The CEO of Chips Ahoy! and Oreo manufacturer Mondelez International, Inc. (MDLZ) put it well, noting that "If I need to start worrying about something that will affect my volume 10 years down the road by a half to 1%... well, I think I have other things that are more important to deal with."
I can't imagine the drug would have a greater impact on pharmaceuticals than snack sales.
All these acquisitions have treated BMY shareholders very well, even as the stock price has dropped. Bristol-Myers has kept its dividend growing consistently for the last 16 years, to a current 4.6% yield. The last dividend cut was 52 years ago.
Add It All Up, And I Believe the Stock Is Wildly Undervalued
Assuming even a 2% growth rate over the next 5 years, I could easily see BMY valued at $90. That's nearly 85% higher than today's prices.
And there are a lot of pharma stocks in the same position: sitting in the Red Zone, deeply undervalued and due for a comeback.
These are high-quality companies with great Business Quality scores and Financial Strength ratings, with high cash flow and solid positioning in their sectors – and that's why I want to bring them to your attention. These fundamentals suggest incredible opportunity, if they inspire enough conviction to overlook the Red Zone indicators and poor headlines.
I'm not looking to enter a new trade on BMY yet, but I'm keeping tabs on it: the stock is currently in a Trade Cycles Valley, and while the system notes it as a low-risk investment, I'd be more comfortable waiting for it to enter a Peak later in the year and seeing how things develop.
Speaking of developments in the pharma sector, for those of you still in our earlier trade in Organon (OGN), I'm keeping an eye on the stock as we close out the year and move into January. I plan on setting up a new covered call to get our shares called away… but I'm waiting for more premium to get started. OGN may see a "January Effect" bounce we can make good use of. Hold on for now.
Keep an eye out for that and other trade alerts coming soon. And while you're at it, write into the mailbag at emailmikeburnick@tradesmith.com and let me know your thoughts on Green in the Red Zone. What's your take on my ideas? Do you have other Red Zone stocks on your radar? I'd love your feedback.
Good investing,
Mike Burnick Senior Analyst, Ultimate Income
P.S. If you have any questions or concerns, please reach out to me at emailmikeburnick@tradesmith.com and include "Ultimate Income" in the subject line.
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