We recently compiled a list titled 7 Best Cheap Stocks to Buy According to Billionaire Ray Dalio. In this article, we will look at where Merck & Co., Inc. (NYSE:MRK) ranks among the best cheap stocks to buy according to billionaire Ray Dalio.
Born in 1949, Ray Dalio bought his first stock, Northeast Airlines, at the age of 12. Later, the investment manager graduated from Long Island University in 1971. Before going to Harvard Business School, he spent some time as a clerk on the NYSE. In 1973, he became Director of Commodities at Dominick & Dominick LLC. After working there for 1 year, he then spent one-year trading futures at the brokerage firm of Shearson Hayden Stone before founding Bridgewater Associates. He has been serving as co-CIO, a position he shares with Robert Prince and Greg Jensen.
As of now, Bridgewater Associates is being tagged as a premier asset management firm, which is focused on delivering unique insight and partnership for the most sophisticated global institutional investors. The firm’s investment process revolves around understanding how the world markets and economies work, leveraging cutting-edge technology to validate timeless and universal investment principles.
Understanding Ray Dalio’s Investment Philosophy
The broader understanding of the “Economic Machine ” influences Ray Dalio’s investment philosophy. The investment manager believes that understanding the working of the economy forms the fundamental part of successful investing. According to him, the economic cycle is divided into 3 main phases: 1) Inflationary, 2) Disinflationary, and 3) Deflationary. The investors must adapt their strategies after considering where the economy is in this cycle. Ray Dalio’s deep understanding of the broader global economy led him to correctly predict Mexico’s 1980s financial crisis, reflecting that he can spot risks and opportunities. He also believes that debt cycles have an important role to play in shaping economic and market conditions.
Ray Dalio realized that the economy tends to move in cycles, fluctuating between periods of growth and decline. This led to the development of the “All Weather” portfolio at Bridgewater Associates, which targets to minimize volatility throughout market environments. According to him, assets like stocks, bonds, and currencies respond differently to broader conditions. This is known as inverse correlation. Therefore, Dalio emphasizes that diversification remains a key in managing risk in an investment portfolio.
Next, Ray Dalio believes in systematic decision-making. At the time of research, his principles use a very data-driven approach. This means that he conducts research using historical pricing, financial figures, and economic indicators so that market direction can be accurately predicted. He continues to focus on maintaining principle-based decision-making processes, algorithms, and data-driven analysis.
Ray Dalio’s investment principle of “Strategic Selling for Maximum Profit” focuses on the idea of making informed decisions regarding when to sell investments in a bid to maximize the returns while, at the same time, managing risk. As of the end of Q2 2024, Bridgewater Associates has ~21.7% exposure to the services industry, ~19.6% to the technology sector, and ~12.1% to the consumer goods business.
Bridgewater Associates’ View on US Equities
Since 2010, while the broader tech sector saw an outsized impact, the US outperformance was broad-based throughout sectors. The US outperformance concerning sales and margin growth was roughly half because of the US tech sector and half as a result of other sectors, while the impact on P/E expansion remained even higher for tech. In contribution terms, Bridgewater Associates stated that technology made up for ~54% of the total 74% US equity outperformance since 2010 as compared to the developed world.
The investment firm believes that some of the largest drivers of US equity outperformance should not be relied upon moving forward. The direction of the markets depends on the ability of the US tech to deliver and Al to unleash productivity throughout sectors. This is for both (a) the US Big Tech directly, which now makes up over ~30% of the index and increased expectations, and (b) how the Al/ML technology will help the companies and how much of it gets captured as margins by these companies across the various non-tech sectors.
Our methodology
To list the 7 Best Cheap Stocks to Buy According to Billionaire Ray Dalio, we sifted through Bridgewater Associates’ Q2 2024 13F portfolio. After extracting the list of his holdings, we chose the stocks that are trading at a forward earnings multiple of less than ~23.52x (since the broader market trades at a forward earnings multiple of ~23.52x, as per WSJ) and selected the 7 best cheap stocks to buy. Finally, the stocks are ranked in ascending order of the fund’s stakes in them.
At Insider Monkey we are obsessed with 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)
Bridgewater Associates’ Stake Value: $223,086,486
Number of Hedge Fund Holders: 96
Forward P/E Ratio as of 4 October: 11.00x
Merck & Co., Inc. (NYSE:MRK) operates as a healthcare company worldwide. It carries out operations via 2 segments, Pharmaceutical and Animal Health.
Wall Street analysts remain optimistic about the growth prospects of Merck & Co., Inc. (NYSE:MRK) as the company has diversified its drug portfolio and expanded throughout different geographies. Moving forward, Merck & Co., Inc. (NYSE:MRK)’s earnings are expected to be fueled by its recent acquisition of a biotech firm, Harpoon Therapeutics. This acquisition should help Merck & Co., Inc. (NYSE:MRK) in boosting its oncology pipeline.
Additionally, Merck & Co., Inc. (NYSE:MRK) possesses strong potential to develop several other opportunities for the development of powerful new combination therapies. Harpoon’s technology platform is versatile and effective at creating cancer-fighting therapies. Merck & Co., Inc. (NYSE:MRK) has announced strategic portfolio changes, targeting a sustainable long-term growth trajectory. It recently highlighted the divestiture of Surface Solutions and an improved focus on high-tech applications in electronics and life science technologies.
Merck & Co., Inc. (NYSE:MRK) saw an improvement in order intake and in book-to-bill ratio, which hints at potential future revenue growth. The company exhibited resilience in its strategy to balance investment in internal R&D with external innovation. This ensures a strong pipeline for future growth. For FY 2024, the company raised and narrowed its expected worldwide sales range to $63.4 billion – $64.4 billion. It expects non-GAAP EPS of between $7.94 – $8.04.
Cantor Fitzgerald reaffirmed an “Overweight” rating, setting a price target of $155.00 on 3rd October.
Carillon Tower Advisers, an investment management company, released its first quarter 2024 investor letter. Here is what the fund said:
“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 4th on our list of best cheap stocks to buy according to billionaire Ray Dalio. While we acknowledge the potential of MRK as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued 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.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’
Disclosure: None. This article is originally published on Insider Monkey.