Every investor knows that the path toward profits lies in buying low and selling high. That’s a basic precept of any economic trading system. The trick, however, is recognizing when the stock is low enough to buy in. The prime moment to buy is when the stock hits bottom; that will maximize returns when the share price starts to rise again.
Wall Street’s analyst corps know this, and they are not shying away from recommending stocks that may have hit bottom. Using TipRanks database, we pinpointed two such stocks. Each is down significantly, but each also has enough upside potential to warrant a Buy rating.
Vertex Pharmaceuticals (VRTX)
We’ll start with Vertex Pharmaceuticals, a biotech firm that got its start back in 1989, researching treatments for cystic fibrosis. The company now has four approved drugs on the market for the treatment of CF, and is expected to dominate this particular segment for the next two decades. Nevertheless, the stock has been falling this year, and is down 20% year-to-date.
The most recent sell-off came this past Friday, June 11, and coincided with the company’s decision to end its clinical trial program for VX-864, a drug candidate under investigation as a treatment for alpha-1 antitrypsin (AATD). The decision was made after the drug failed to show clear clinical benefits in its Phase 2 trial.
Biotech research programs fail frequently – it is a baked-in risk of the business. Of greater concern to investors than this individual program is the larger fact that over the years Vertex has yet to develop a successful drug program outside of its line of CF treatments. Concern that the company may be a one-trick pony underlay the recent sell-off.
Within the CF program, however, Vertex has had considerable success. The company’s four approved drugs (trade names Trikafta, Symdeko, Orkambi, and Kalydeco) are proven money-makers in an established market, and the company has seen revenues increase sequentially in the last 6 quarters. The most recent quarter, 1Q21, showed $1.72 billion at the top line, up 14% year-over-year. GAAP EPS, at $2.49, was up 8.7% yoy.
Writing on Vertex in the wake of the VX-864 discontinuation, Cowen analyst Phil Nadeau acknowledges the failure of the program – but also the company’s fundamental strength.
“While ‘864’s demise is disappointing, in some ways it is a ‘good failure’ that advances the program and partially de-risks safety and the mechanism. Vertex has a track record of iterating in its pipeline, producing increasingly better candidates. We are optimistic that Vertex will eventually produce a successful AAT corrector that increases fAAT levels above the protective threshold, with benign safety… We think Vertex is positioned for L-T outperformance as CF franchise revenue grows at a 9% CAGR and pipeline candidates advance,” Nadeau opined.
Nadeau sees Vertex in the process of ‘failing up,’ and rates the stock an Outperform (i.e. Buy). His $300 price target implies an upside of 59% on the one-year time frame. (To watch Nadeau’s track record, click here)
A look at the analyst consensus shows that Nadeau is hardly an outlier on this stock. Of the 24 recent reviews, 19 are to Buy and only 5 are to Hold, making the consensus view a Strong Buy. The shares are priced at $188.97 and the $261.68 average price target suggests a 38% one-year upside. (See VRTX stock analysis on TipRanks)
OneConnect Financial Technology (OCFT)
Now let’s change gears, and move from biotech to software tech. OneConnect is a fintech, operating in China’s digital banking sector. This puts the company solidly in the middle of a huge potential growth market; digital banking was expanding before corona, but the pandemic year saw online banking services expand. The digital banking market is estimated at $8 trillion globally – and China, with the world’s largest population and second largest economy, is positioned to make outsize gains in the area. This is the environment in which OneConnect lives.
The company offers technology-as-a-service, putting a range of digital banking tools and applications on one platform. This makes OneConnect a one-stop-shop for digital banking providers, and the company serves almost all of China’s major and city banks, and more than half of the country’s insurance companies.
OneConnect has, like many expanding tech companies, been running consistent net losses. The company has yet to turn a profit – although the 1Q21 EPS loss of 13 cents was an improvement over the year-ago loss of 17 cents per share. At the top line, Q1 revenues came in at $126.5 million (820 million Chinese yuan), up 52% year-over-year.
Even with that, however, the stock dropped sharply this year, losing 39% of its value. Yet, at least one analyst sees the current low share price as a chance to buy in.
“The recovery in the business activities has driven revenue from third-party customers, helping to maintain the accelerating yoy growth trajectory, and we expect this trend to remain in the coming quarters, on: 1) delivery of sizable contracts secured in 1Q… and 2) easy comparables ahead in 2H21 as the company has ramped up its product-optimisation efforts, i.e. exiting the low-margin legacy products (mainly in the business origination segment), since mid-2020,” Lo wrote.
Overall, while there are only two recent reviews on file for OneConnect, both agree that this stock is one to buy, making the Moderate Buy consensus unanimous. The share price, of $12.07, and the average price target of $22, together suggest a one-year upside potential of 82%. (See OCFT stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.