In a month in which the S&P 500 fell nearly 3%, many investors are finding themselves a bit on edge. The weakness this month was primarily led by increasing fears of a “trade war” with China and the Facebook (FB) data security crisis. While it is easy to become fearful when stock market volatility increases, we always advise that investors should trust their research and learn to use market selloffs as buying opportunities.
While reviewing our “Wide Moat & Profitable Growth” portfolio, based on 5-year EPS growth estimates many of our holdings are trading at deep discounts. I will reveal two growth stocks that we project to have over 100% upside potential over the next 5-years. These two stocks are AbbVie (ABBV) and Alibaba Group Holding Ltd (BABA).
Humira Formula Patents Carry Greater Significance
Shares of AbbVie plummeted in March after the firm reported disappointing news in regards to its relapsed/refractory small cell lung cancer (SCLC) trial. Phase 2 data results from rovalpituzumab tesirine (Rova-T) trials were less than satisfactory. As a result, AbbVie decided it would no longer pursue accelerated FDA approval of Rova-T.
After the negative phase 2 studies, some firms lowered their earnings guidance on AbbVie for 2018 and beyond. One firm in particular Credit Suisse lowered its guidance for fiscal year 2020 from $10.09 to $9.86…a $0.23 drop in EPS guidance. AbbVie’s stock price fell nearly 17% in the month of March in response to a $0.23 drop in guidance. This reaction seems irrational considering the stock is currently trading at a forward-PE of 13 and is forecasted to grow EPS at 12-13% over the next 5-years.
Our take is that Humira is clearly AbbVie’s most important drug and we should not see any US biosimilar drugs until 2023. AbbVie yields over 4% at current levels and is trading a very reasonable price compared to its growth rate. We are calling AbbVie a buy here!
Growth Over Seas
China’s economy is growing at a 6-7% annual rate and is on track to pass the United States as the largest economy in the world within the next decade or two. China’s middle class is made up of 1.3 billion individuals and those individuals are beginning to shop online a lot! In this scenario it only makes sense to own stock in the most dominant Chinese e-commerce company, Alibaba.
You have probably heard of Alibaba referred to as the Amazon (AMZN) of China. The similarities between Alibaba and Amazon don’t stop at online retail. Alibaba, like Amazon, also has a dominant and rapidly growing cloud computing business. In Q4, 2017 its cloud business grew by 104% YoY. Note the global cloud computing leaders in the graphic below:
Aside from its already impressive e-commerce and cloud computing businesses, Alibaba also owns a portion of a rapidly growing fintech company called Ant Financial. We think Alibaba is well positioned for the next decade! The e-commerce, cloud computing, and the mobile payment industries should continue to see plenty of growth!
Alibaba’s stock is currently trading at forward-PE of 26. Analysts have forecasted a 5-year EPS growth rate of 29%, assigning Alibaba a PEG of 0.88. Note the chart above, we see this as a perfect opportunity to buy a high quality holding in Alibaba.
Thank-you for reading! We believe that investors looking for growth at a reasonable price should consider investing in both AbbVie and Alibaba. Altogether, we currently have 29 holdings in our “Wide Moat & Profitable Growth” portfolio and 1/3 of the portfolio is forecasted to deliver returns greater than 100% over the next 5-years. You can subscribe to our newsletter here!
- On March 31, 2018
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