It has been a crazy year for the investment community. They went through the fastest slowdown of at least 30% in benchmark history S&P 500 and enjoyed the most robust rebound rally ever. Patience has certainly paid off for long-term investors.
But just because the widely followed S&P 500 is a stone’s throw from its all-time high doesn’t mean there aren’t any good deals. In particular, three top stocks stand out for their combination of growth and value and should be able to make investors much richer in April and well beyond.
It’s no secret that growth stocks have been hampered over the past six weeks by a combination of sector rotation and concerns about rising Treasury bond yields. But this recent panic is creating plenty of opportunities for investors with a long-term horizon. This is why the strong growth cybersecurity stock CrowdStrike Holdings (NASDAQ: CRWD) is a buy now business.
The macro thesis for cybersecurity is quite simple. We were already seeing companies gradually shifting their presence online and in the cloud before the coronavirus pandemic struck. The pandemic has simply accelerated this change and increasingly placed the responsibility for protecting corporate data on third-party vendors like CrowdStrike.
The company-specific thesis is that CrowdStrike’s cloud-based Falcon security platform is a beast. It was built in the cloud and is capable of overseeing over 5,000 billion events every week. By leveraging artificial intelligence, Falcon becomes more efficient at identifying potential threats to corporate data over time. This is why, in many cases, CrowdStrike’s cloud native security solutions respond faster and provide a more cost-effective long-term solution than on-premises security options.
The adoption of CrowdStrike’s security solutions has been nothing short of amazing. Dollar retention rates – a measure of year-over-year spending growth for existing customers – have fluctuated between 123% and 147% over the past 12 quarters, implying sales growth year on year at least 23% to 47% for loyal customers. What else, 63% of its customers have at least four cloud module subscriptions, or 9% less than four years ago. Many of the company’s customers are growing rapidly and Falcon was designed to grow seamlessly with them.
But the biggest surprise of all might be that CrowdStrike’s subscription gross margin has already hit its long-term goal of 75-80% early in its growth phase. Subscription cybersecurity models provide very transparent and high margin cash flow, especially with a customer retention rate set at 98% for over two years.
CrowdStrike has the potential to grow its revenue by over 30% per year throughout the decade. This makes his latest pullback an obvious buying opportunity.
For those of you with an above average tolerance for risk, biotechnology stocks Intercept pharmaceuticals (NASDAQ: ICPT) offers an intriguing risk / reward scenario that could make patient investors much richer.
For better or worse, the future of Intercept rests with obeticholic acid (OCA), a drug currently being investigated as a treatment for non-alcoholic steatohepatitis (NASH). NASH is a liver disease that affects up to 5% of the American adult population. This can lead to liver fibrosis, liver cancer, and even death. Currently, there is no cure for NASH, but it is valued as a $ 35 billion opportunity for drug developers.
The good news for Intercept is that the OCA meets one of its two primary endpoints in advanced stage trials. In data published in February 2019, OCA led to statistically significant improvement in fibrosis of at least one stage without worsening NASH. Given that most other NASH drug developers have experienced setbacks, it seemed Intercept was in pole position to crack the code for this difficult-to-treat disease.
The bad news is that the company has received a comprehensive response letter from the U.S. Food and Drug Administration, which demands additional safety data from ongoing studies. The highest dose of OCA in the Phase 3 Regenerate trial leads to pruritus (itching) in 51% of patients, with a grand total of 9% of patients who dropped out of the study. This compared to about 1% of placebo patients who quit.
The buying thesis is that Intercept will meet additional security demands and that the benefits of OCA will outweigh the risks of relatively mild to moderate adverse events. Even if OCA is given to a smaller subset of the sickest NASH patients, Intercept could generate well over $ 1 billion in annual sales.
Best of all, OCA is approved to treat primary biliary cholangitis (PBC) under the brand Ocaliva. This year, Ocaliva is expected to bring in between $ 325 million and $ 355 million for the treatment of patients with PBC. With Intercept’s market cap at $ 764 million, this past weekend Wall Street is placing an extremely low multiple of about twice the company’s sales. Essentially, investors are get free OCA as a potential treatment for NASH, with Ocaliva for PBC providing a downward buffer.
The risk / return scenario here absolutely favors optimists.
Kirkland Lake Gold
If deep discount value is more your thing, you are going to find an abundance single-digit and low double-digit price-to-earnings ratios in an unlikely industry. After years of cost cutting and a healthy recovery in physical gold, a number of gold stocks now perfectly in line with value stocks. Maybe none are more attractive than Kirkland Lake Gold (NYSE: KL).
Before delving into the Kirkland Lake purchase thesis, it is important to think about why physical gold should be sustained or head higher in the years to come. In no particular order:
- Global bond yields may have risen in recent weeks, but many of them still offer yields below the rate of inflation.
- The Federal Reserve has reiterated its intention to keep its target federal funds rate at or near all-time lows until 2023.
- The Fed is continuing its monthly bond buying program.
- The Biden administration recently passed $ 1.9 trillion in stimulus packages and may be looking at $ 3 trillion or more in additional spending.
The point is that the money supply is growing, which should put pressure on the US dollar. As the dollar and physical gold move opposite each other, an accommodating monetary policy bodes well for gold.
As for Kirkland Lake, it operates three of the most efficient gold mines in the world. The Company’s All-Inclusive Sustaining Costs (AISC) for its three producing assets amounted to $ 800 per ounce of gold in 2020. Even after a decline in physical gold, Kirkland Lake has a net margin of more of $ 900 per ounce.
In addition, Kirkland Lake has what is arguably the best track record in the entire mining industry. He ended the year with $ 847.6 million in cash and no debt (yes, no debt) and generated $ 733.1 million in free cash flow following the acquisition of the Detour Lake mine. Such a strong balance sheet has enabled the company to triple its quarterly dividend and repurchase 20 million shares.
Value investors can get Kirkland Lake Gold shares back now for just nine times earnings per share in 2021 and just six times cash flow. In my experience in the gold industry, a multiple of 10 times cash flow reflects fair value.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.