Late last year I began using Motley Fool’s My CAPS as a way for readers to track my new investments and those that fit under the guidelines in my book Taking Charge With Value Investing (McGraw-Hill, 2013). The concept of CAPS is to make selections based on a time allowed and then you earn points for every percent that your selections outperform its index. The score is then totaled and it equates to a rating, with 100 being the absolute best.
Currently, my rating is 93.50 and my score is 845.6, with 200 points coming from two selections. Thus I am looking at those two selections, after incredible short-term returns to determine if more upside exists, or if I should take my profits and run!
Surprising Clinical Success Continues To Attract Investors
I first bought ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD) at $5.10 back in December of last year, and then once more at $6.09 (which I then added to My CAPS). Since being added it has produced a score of 105.12 points, and even after such large gains, it is still a “buy” based on the rules within my book (used as the guide for making my selections).
Biotechnology stocks are valued based on both their likelihood for product approvals and then peak sales potential. In order to find value, investors must take this step further and determine sales potential relative to market capitalization as compared to the industry. In regards to ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD), after a successful study for its Parkinson’s disease psychosis product, the company is poised to enter a large and lucrative unmet market.
According to analysts, sales potential could exceed $400 million for its indicated use, but then another $500-$700 million for off-label uses, thus an estimated $1 billion in peak sales. ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD)’s product is a near certainty to be approved, and is therefore trading at one times peak sales potential. In biotechnology, stocks usually trade at 2-3 times peak sales while in late stage development and then 7-15 times peak sales post-launch (chart referenced in book). Thus I believe that short-term, ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD) still has 100% upside, and could become a $7-$10 billion company long-term with a promising pipeline. Hence I am holding this CAP leader and believe that it is the absolute safest developmental biotechnology stock in the market.
Despite Large Gains, This Stock Is Still Surprisingly Cheap
Rite Aid Corporation (NYSE:RAD) is without question my favorite value investment in today’s market. In my book I explain how ideally, I want a company that is very cheap compared to sales with room to improve margins. The reason is because the market awards margins with high premiums. The problem is that if a company operates with total efficiency, it has to sacrifice those margins in order to grow, which is usually frowned upon by analysts and investors.
A company with horrible margins and massive revenue is usually very cheap relative to sales, and has to make very minor changes to improve margins. Such is the case with Rite Aid Corporation (NYSE:RAD), as it posted its first profit in more than six years in 2012. The company’s operational improvements were only possible due to new generics that produce greater margins. Now, after years of disappointment, there are rumors that the company is on pace to produce a profit north of $500 million in 2013 (trading at a forward P/E of 6.0).
I bought Rite Aid Corporation (NYSE:RAD) at $1.23 and it has returned massive gains to my portfolio and 98.11 points to My CAPS. Despite these large gains, Rite Aid Corporation (NYSE:RAD) still trades at just 0.09 times sales! In other words, its five-seven times cheaper than its competitors Walgreens and CVS. In my opinion, with Rite Aid Corporation (NYSE:RAD) seeing such vast improvements, thanks to the patent cliff, I see the upside strong from this point forward. Hence I am not selling anytime soon.
In my opinion, both Rite Aid Corporation (NYSE:RAD) and ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD) have a great deal of upside from this point forward, and I would watch both as the year continues. What’s even more encouraging is that both stocks were so cheap prior to their large gains that a larger long-term trend higher could also occur. With these things considered, I think investors should take a long hard look at both stocks to see how one or both might fit into your portfolio.
The article Are These Top Performers A Sell? originally appeared on Fool.com and is written by Brian Nichols.
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