2 Stocks with Weakness that are Definite Buys
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A pullback in a fundamentally cheap stock should be your best opportunity to overload on value. However, we far too often allow panic or fear to overwhelm this logic. In this piece, I am looking at two stocks seeing pullbacks on Friday morning that are definitely “buys” on the weakness.
Incredibly Strong Earnings Lead to Profit Taking
Bonanza Creek Energy (NYSE: BCEI) is a small cap oil and natural gas company valued at $1.4 billion. Currently, the stock is trading with losses of 5% after posting Q1 earnings that missed expectations. However, this “presumed” weakness, should be used as an opportunity to grab one of the best values in the space.
Bonanza Creek Energy has been a public company for approximately 18 months. Ever since its IPO the stock has been under-the-radar and unnoticed. Originally, the company was expected to price at $21 but was priced well below that range at $17. Turns out the loss of some is the gain of others, as the stock has rallied 165% since its IPO and more than 80% during the last year.
The reason for the company’s performance is its growth. In its most recent quarter, the company “slightly” missed expectations, but still produced top-line growth of almost 65% year-over-year (yoy). In addition, the company saw a 76% rise in sales volume and a 32% rise in net income, which does signal a drop in margins. This drop in margins wasn’t an operational issue, but rather related to the price of crude and also the expansion into new areas.
As we look ahead to the future, Bonanza is projecting production growth of 60%! This is a company that is completing wells about as fast as possible. In fact, in the Rocky Mountain region, four new wells were incorporated into sales during the second half of March (only three total in the previous two months of the quarter). This indicates significant upside, as does the eight completions per month that the company expects by the end of the second quarter. Basically, the company is growing rapidly and there is no reason to believe that it will stop.
From a valuation point of view, the stock does appear expensive with a price/sales ratio of 6.0. However, when considering its growth, the stock is about half as expensive as other stocks with similar fundamental returns. The company has great operating margins and trades at just 11.30 times next year’s earnings and I believe that because of its growth, production, and its valuation, that BCEI is a definite “buy” on any level of weakness.
A Biotechnology Stock that is Nowhere Near its Peak
Santarus (NASDAQ: SNTS) is a diversified small-cap commercial biotechnology company that markets five different drugs. Over the last year it has returned gains of more than 230%, and more than 500% since January 2012. Currently, the stock is trading with losses of 6% after announcing a secondary offering of shares from Cosmo Technologies; an offering in which Santarus is receiving no proceeds.
While I do understand that anytime “offering” or “insider selling” is mentioned that it does create fear, I am not surprised at Cosmo Technologies' decision. The goal of any investment, whether it be stocks, bonds, a house or a painting, is to return more money than your original investment. Santarus is sitting at all-time highs and has returned gains of 700% over the last five years. Therefore, why wouldn’t Cosmo Technologies and other long-term insiders take profits? To me, it makes sense, but in my opinion, they are leaving a lot of potential gains on the table.
Rather than discussing past earnings, I’ll say that Santarus is growing so fast that it can’t even predict its own guidance. The company had conservative expectations for its new drug Uceris and the re-launch of Zegerid, yet both have easily exceeded those conservative expectations. The company’s newest guidance includes full-year revenue of $335 million (average), representing growth of 55%. Thus despite large gains, the stock is trading with a price/2013’s sales of just 3.85 and only 15.50 times next year’s earnings.
When you consider the price/sales ratios of 16.0 placed on companies such as Alexion Pharmaceuticals and the industry average of 5.0 you can see that Santarus is very cheap, with industry leading growth. Due to its large gains, it should be expected that some will take gains. Yet because of its growth, its pipeline, and its product line, I do think that Santarus will stand the test of time and will be a great investment for many years to come.
One of the reasons that I wrote my book, Taking Charge With Value Investing (McGraw-Hill, 2013), was to clear common myths and to eliminate the learning curve of trial and error that usually costs retail investors a significant amount of money. One of those myths is that performance indicates value and as a result, there are many retail investors who find themselves seeking “value” in the worst performing stocks or with stocks at the bottom of 52-week lows.
In this article, I showed you how a stock can have strong performance and still be a value investment relative to the market. I believe this is an important lesson because value is more than just price, but rather a collection of performance, valuation, and fundamental growth. In the case of Santarus and Bonanza Creek Energy, both are value investments, they just so happen to be good performers as well. I believe that both are a “buy.”
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Brian Nichols is long SNTS and BCEI The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!