Peter Lynch is widely regarded as one of the best investors of all time, and for good reason. During his 13-year tenure at the Fidelity Magellan Fund, Lynch grew a modest $20 million into a staggering $14 billion. This otherworldly track record has inspired scores of investors to emulate his core strategy that can be summed up as follows: Invest in stocks you understand, ignore the behavior of the broader markets, pick companies with a solid fundamental outlook, and expect to hold your stock picks for at least 10 years.
To help investors identify stocks that meet these criteria, we asked three of our Motley Fool contributors to provide a quick rundown for their top Peter Lynch-like picks. They named AcelRx Pharmaceuticals (NASDAQ: ACRX), Teladoc (NYSE: TDOC), and Bristol-Myers Squibb (NYSE: BMY). Read on to find out more about these outstanding growth vehicles.
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A potential multibagger
George Budwell (AcelRx Pharmaceuticals): Peter Lynch's multipronged investing strategy essentially boils down to spotting undervalued stocks well ahead of the Wall Street crowd, and then allowing time to work its magic. In many ways, the small-cap biotech AcelRx Pharmaceuticals seems to meet these basic tenets.
AcelRx's story centers around its newly approved acute pain medication Dsuvia, a sublingual formulation of the powerful opioid sufentanil. The drug is dosed via a single-use, pre-filled applicator, and its use is restricted solely to medically supervised settings to curtail the potential for abuse.
Dsuvia's target market are patients who are unable to receive sufentanil either orally or intravenously, but require rapid pain relief. And thanks to its easy-to-use applicator, Dsuvia might also be a convenient way to control common medication errors associated with injectable opioids.
Despite these safeguards and clear-cut benefits over injectable pain relievers, Dsuvia's approval by the Food and Drug Administration late last year was met by a wave of criticism from industry experts and caregivers alike. The key concern is that Dsuvia may further fuel the raging opioid crisis.
Unlike many of its peers at the heart of the opioid crisis, however, Dsuvia won't be readily available to leak out of its intended channel. Bad actors, therefore, will have to go to extremes to get access to the drug -- a fact that should keep diversion under wraps.
This new painkiller is also coming to market during a period of increased scrutiny regarding the prescribing habits of caregivers and marketing practices among pharma companies. A good chunk of the opioid crisis can be directly attributed to overzealous prescription habits stemming from aggressive marketing tactics by drug manufacturers. These unscrupulous practices, however, are finally being addressed in earnest by regulators and law enforcement.
What's the key takeaway? AcelRx's present enterprise value of approximately $215 million is a mere fraction of Dsuvia's commercial opportunity -- thanks to the value gap created by the poor optics surrounding Dsuvia right now. But this novel pain medication seems destined to eventually rake in sales well north of $1 billion. AcelRx's stock, in turn, should be able to produce outstanding gains for early-bird investors from this point forward.
A great healthcare story
Keith Speights (Teladoc): You might call Peter Lynch a "story" investor who likes to buy the stocks of companies with good stories. I think that Teladoc has one of the best stories in the healthcare industry.
Teladoc Health provides telehealth services. Patients can visit healthcare providers virtually online or over the phone. Using Teladoc is a whole lot more convenient than a visit a physician's office. But convenience is really only a minor part of Teladoc's value proposition.
The big advantage that Teladoc Health offers is cost savings. That's not surprising since the company doesn't have to maintain brick-and-mortar buildings. This cost-savings angle is a big reason Teladoc has roughly 40% of the Fortune 500 in its customer base.
Teladoc Health is growing by leaps and bounds -- its compound annual growth rate (CAGR) for revenue is a whopping 75% over the last five years. The company's future growth opportunities continue to look promising as baby boomers age. These individuals will need more healthcare services, but they'll also drive overall healthcare costs higher. These soaring costs will prompt employers, insurers, and government healthcare programs to look for ways to control those costs. And that should help fuel growth for Teladoc.
I think that Teladoc is easily one of the top healthcare stocks to buy in 2019. And because of its great story, I think it's a stock that Peter Lynch would love.
This big pharma checks all the right boxes
Sean Williams (Bristol-Myers Squibb): Peter Lynch is known for sticking with companies he can understand, but he also seeks out businesses that meet certain growth metrics, and offer value that Wall Street appears to be overlooking. Within the healthcare industry, this almost perfectly encapsulates big pharma stock Bristol-Myers Squibb.
Generally speaking, drug companies aren't always the easiest to understand; that's typically because they put their hands into too many cookies jars at once. With Bristol-Myers' core brand-name drugs, we're predominantly looking at cancer treatments, with an anti-inflammation drug and an anticoagulant mixed in. The remainder of revenue comes from established brands (i.e., off-patent therapies) that generate cash flow, but aren't the future of Bristol-Myers Squibb. In other words, if its core portfolio of six therapies sees label expansion opportunities, and an uptick in demand and pricing power, this company is going to do well.
At the heart of Bristol-Myers' growth are cancer immunotherapy Opdivo and blood-thinner Eliquis, which was developed with Pfizer (NYSE: PFE). Opdivo, a premier treatment for second-line advanced renal cell carcinoma and second-line non-small-cell lung cancer -- among numerous other indications -- generated $6.74 billion in sales in 2018, a 36% year-over-year increase. And the drug looks well on its way to eventually hitting $10 billion (or more) in annual revenue. As for Eliquis, it's the premier oral anticoagulant, with total sales rising 32% to $6.44 billion last year.
Bristol-Myers is also in the process of acquiring Celgene (NASDAQ: CELG) in what was announced as a $74 billion deal in early January. For each share of Celgene stock, investors will receive $50 in cash, one share of Bristol-Myers' stock, and potentially a $9 per share contingent value right that's dependent on the progress of three of Celgene's key experimental therapies. Acquiring Celgene means bringing superstar multiple-myeloma drug Revlimid into the fold -- a drug that could very well become the top-selling drug in the world within a few years. This deal will make Bristol-Myers a cancer-drug powerhouse, and it's the game-changer that Wall Street isn't paying close-enough attention to.
Lastly, Bristol-Myers checks off most of the important boxes for Peter Lynch. It has a low forward P/E of 10 and a very reasonable price-to-earnings-growth (PEG) ratio of 1.38. It also has $1.5 billion in net cash, and generated close to $6 billion in operating cash flow in 2018. With the exception of being valued at five times book value, Bristol-Myers Squibb is almost the perfect Peter Lynch stock. Nevertheless, one minor blemish wouldn't stop Lynch from falling in love with this stock.
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George Budwell owns shares of Celgene and Pfizer. Keith Speights owns shares of Celgene, Pfizer, and Teladoc Health. Sean Williams owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene and Teladoc Health. The Motley Fool has a disclosure policy.