While the phrase "monster stocks" might generally have investors thinking of Tesla, Apple, or similar behemoths, the two businesses discussed in this article are sneakily monstrous.
First, consumer health juggernaut Kenvue (KVUE -0.88%) produces and markets seven No. 1 global brands. And in less than a year since its spinoff from an actual monster stock, Johnson & Johnson, its dividend yield has ballooned to 4.2%.
Meanwhile, ResMed (RMD -0.30%), a leader in continuous positive airway pressure (CPAP) machines, has delivered enormous total returns of over 24,000% since its initial public offering (IPO) in 1995.
Currently selling down roughly 33% to 44% from their 52-week highs, these two monster stocks have the potential to be phenomenal buys at their current prices. Let's find out a bit more about these two stocks.
1. Kenvue: Down 33% from 52-week highs
Home to seven No. 1 global brands -- Tylenol, Nicorette, Zyrtec, Neutrogena, Listerine, Johnson's, and Band-Aid -- Kenvue operates in 165 countries. Through its three diversified business segments -- self care, skin health and beauty, and essential health -- it's the largest pure-play consumer health company that's publicly traded. Another indicator of its business diversification is that Kenvue generates a nearly 50-50 split between North American and international sales.
The diversification helps Kenvue maintain a steady business, but it is unlikely to be mistaken for a growth stock. Sales inched up 3% year over year in its most recent quarter amid softness in China and ongoing supply chain issues. Those numbers moved in sync with the broader consumer health industry. That industry is forecasted to grow between 7% and 9% annually through 2030. It's not high-flying growth, but it is undeniably stable growth.
Making matters worse, Kenvue is in the very early stages of a lawsuit alleging that its Tylenol painkiller caused neurological disorders in children whose mothers used the medicine during their pregnancy. While the ramifications of this lawsuit could be large, it is worth noting that the Food and Drug Administration (and most health organizations) have monitored Tylenol for years and consider it among the safest painkillers approved for expecting mothers.
The plaintiff's lawyers will have a difficult task trying to draw correlations between Tylenol and neurological disorders -- what would be a first-of-a-kind discovery regarding Tylenol. The next steps in the lawsuit are scheduled for December, so current and potential Kenvue investors should keep an eye on further developments, as a negative ruling would increase the risk of losing on a Kenvue investment.
While lawsuit worries have contributed to the stock's price drop of late, there are at least three other reasons that Kenvue is an exciting investment today:
- Sizeable free cash flow (FCF) generation: Kenvue created over $2.5 billion in free cash flow last year, giving it a strong 16% FCF margin. This incredible profitability highlights the power that the company's megabrands continue to provide.
- A healthy 4.2% yield: With the robust FCF generation (along with the stock price drop), Kenvue currently pays a dividend yield of 4.2%. The payout ratio needed to support the dividend is a very manageable 61%, which implies safety and suggests there is plenty of room for continued growth in the dividend.
- A discounted valuation: With a market capitalization (total company value) of $36 billion, Kenvue trades at just 14 times FCF. Even if we use the company's enterprise value, which includes Kenvue's $7 billion in net debt, it still only trades at 17 times FCF. With the S&P 500 "consumer non-cyclical" sector selling at 36 times FCF, Kenvue's steady operations look deeply discounted.
Down 33% from its 52-week highs and steadily marching lower since its IPO, Kenvue's stock may finally be reaching a tipping point for investors. Thanks to its hefty dividend yield, broad geographic presence, and numerous No. 1 brands, Kenvue looks like a great purchase at today's harsh valuation -- especially should it receive a positive ruling in its upcoming Tylenol lawsuit.
2. ResMed: Down 44% from 52-week highs
Quickly growing to become the global leader in continuous positive airway pressure (CPAP) systems, ResMed has produced total returns of 24,000% since 1995, making it one of the most successful companies of the past three decades. ResMed's CPAP devices can potentially help people with sleep apnea, chronic obstructive pulmonary disease (COPD), neuromuscular diseases that affect respiration, and insomnia. The number of people with those types of issues globally is estimated at more than 2 billion. ResMed's devices have helped more than 135 million people over the last year, which suggests there are hundreds of millions of additional potential people out there still in need of ResMed's assistance.
ResMed managed to grow sales by 16% year over year in its most recent quarter (and 21% over the last year). But those solid growth numbers weren't enough to convince a market to keep the stock price elevated of late.
Some investors are concerned that the rise of GLP-1 (glucagon-like peptide 1) drugs used to treat obesity will reduce ResMed's potential market for its products. Roughly 77% of people categorized as obese also suffer some level of sleep apnea. Studies also show that weight loss improves/reduces sleep apnea. The increased use of GLP-1 drugs like Wegovy or Ozempic could potentially reduce the millions of sleep apnea sufferers out there. How much effect these potential new drugs will actually have on sales is still to be seen, but obesity drugs are unlikely to destroy ResMed's business.
ResMed CEO Michael Farrell said his company is already tracking thousands of patients who are using both GLP-1s and CPAP systems, and ResMed has yet to see any dropoff in usage of the company's devices. In fact, Farrell said he believes the company could see a temporary boost from GLP-1 drugs:
[W]e truly believe that this idea that you could come in to the healthcare system, someone who's maybe obese, or morbidly obese likely avoiding the healthcare system, there's a high avoidance of people with BMI of 30, 32, 35 of the primary care system. And so we believe it will bring more patients in. We're seeing that with our very high patient flow.
While the impact from weight-loss drugs may take years to play out, and we'll have to wait to see how strong this impact is on ResMed's operations, early indications are that it is doing just fine. Now valued at 24 times earnings -- its lowest price-to-earnings (P/E) ratio since 2016 -- ResMed trades at a deep discount to its historical averages, as the market waits to see what happens.
RMD PE Ratio data by YCharts.
On top of this much more reasonable valuation, ResMed's current 1.3% dividend yield is its highest since 2018, and the dividend only uses 27% of net income. This leaves a long runway for dividend increases as the company builds upon its 10 consecutive years of payout raises.
Early indications are that ResMed's leadership position in the CPAP industry and importance to the world are as robust as ever. Trading at this low valuation, the stock is a perfect contrarian buy to make today.
