Hand: I'll give you one recent example—Merck. Going into 2022, it was a good example of the risk asymmetry we look for and how valuable that is. The stock is up strongly this year in a market that’s down. And yet it’s still only trading at a low-teens P/E multiple on 2024 earnings and has a yield still north of 2.5%.2
What has happened is that there’s been a greater appreciation for the business, the successes of its drug development and pharmaceuticals, and the long-term position of the cancer-fighting drug Keytruda—all of that has bubbled up to a higher but still discounted valuation.
Why we really leaned into Merck, making it a big position in the portfolio, is its animal health business and vaccines franchise, which are a little bit different than the standard pharma that you think about with patent risk. These businesses represented about one-quarter of the business coming into this year, but we see them growing over the next 10 years.
So with this stock, you really have what we look for—that asymmetry in risk and reward with Merck’s relatively low volatility and what we believe is a really compelling valuation for a big-yield company.