We recently compiled a list of the 16 Most Undervalued Stocks to Buy Now. In this article, we are going to take a look at where Merck & Co., Inc. (NYSE:MRK) stands against the other undervalued stocks.

With the US stock market touching record highs, mainly driven by significant contributions from big technology sectors, domestic and global investors continue to observe market dynamics to tap potential opportunities. Therefore, identifying undervalued stocks becomes important as they might provide substantial value amidst high valuations across sectors.

Concentration of S&P 500

Courtesy of “Magnificent 7” stocks that captured investor attention in 2024, the market cap concentration in the leading US equities is the highest in decades. Strategists at Goldman Sachs believe the 10 largest US stocks now constitute ~33% of the S&P 500 index’s market value. This is well above the ~27% share reached at the peak of the tech bubble which was seen in 2000.

The present concentration helped in driving a period of strong US market returns. The market saw an annualized total return of ~16% over the previous 5 years. This compares to the 30-year annual average of 10%. As per Goldman Sachs, the top 10 stocks made up for over a third of that gain. That being said, “today’s top stocks are trading at lower valuations than the largest stocks did at the peak of the tech bubble in 2000.”

Despite healthy returns, investors are anxious regarding the extreme current degree of market concentration relative to the recent history.

There appear to be similarities between the current conditions today and the episodes in 1973 and 2000. The labor market seems to be in a decent state, and concentration has been rising along with robust equity market returns. In these episodes, the peak of equity market concentration also led to the peak of a bull market, and the US economy saw recessionary fears in the subsequent year.

However, the 1964 experience reflects that an ongoing bull market might continue to move higher despite a decline in market concentration. After the market concentration peaked, stock prices and the US economy were resilient for an extended period.

Are The US Stocks Overvalued or Undervalued?

The valuations of the largest stocks are well below the previous highs. As of now, the 10 largest stocks continue to trade at the collective forward P/E multiple of ~25x, well below the peak valuations seen in the largest stocks in 2000, 2020, and the middle of 2023.

The valuations are also lower based on the premium the largest stocks are trading at relative to the rest of the market. That is to say that the ~35% valuation premium today remains well below the 80% premium seen in the middle of 2023 and the 100% premium of 2000. Though the degree of market cap concentration is indeed higher today as compared to the peak touched in 2000, the largest stocks are trading at much lower multiples than during the technology bubble.

Our methodology

We used the Finviz screener to extract the list of 16 Most Undervalued Stocks to Buy Now. We have shortlisted the stocks that are expected to report earnings growth this year and have a forward P/E multiple of less than ~21.66x (as the market trades at the forward multiple of ~21.66x). We ranked the stocks in ascending order of their hedge fund sentiment.

Why are we interested in 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).

A close-up of a person's hand holding a bottle of pharmaceuticals.

Merck & Co., Inc. (NYSE:MRK)

Forward P/E as of 22 August: 14.47x

Expected EPS Growth this Year: 434.4%

Number of Hedge Fund Holders: 96

Merck & Co., Inc. (NYSE:MRK) is engaged in making pharmaceutical products to treat several conditions in several therapeutic areas, such as cardiometabolic disease, cancer, and infections.

Wall Street analysts believe that the company has done a great job by diversifying its drug portfolio and expanding throughout different geographies. After all, it mints money from vaccines and immunotherapy drugs. Moving forward, the company's earnings growth is expected to stem from its recent acquisition of a biotech firm, Harpoon Therapeutics. This acquisition should help Merck & Co., Inc. (NYSE:MRK) in boosting its oncology pipeline directly.

Additionally, it might develop several other opportunities for the development of powerful new combination therapies. Harpoon's technology platform is quite versatile and effective at creating cancer-fighting therapies.

Harpoon's strategies are likely to be compatible or even synergistic with several other old and new cancer medicines such as chemotherapies, cell therapies, and antibody-drug conjugates. This means that the company might not be required to steal the market share to gain traction.

For FY 2024, Merck & Co., Inc. (NYSE:MRK) raised and narrowed its expected worldwide sales range to be between $63.4 billion - $64.4 billion. It expects non-GAAP EPS of between $7.94 and $8.04. Analysts at Cantor Fitzgerald reaffirmed an "Overweight" rating on the shares of Merck & Co., Inc. (NYSE:MRK), giving it a price target of $155.00 on 18th June.

Carillon Tower Advisers, an investment management company, released its first quarter 2024 investor letter. Here is what the fund said:

Overall MRK ranks 2nd on our list of the most undervalued stocks to buy. 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.

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Disclosure: None. This article is originally published at Insider Monkey.