While investors shifted their focus from growth stocks to value stocks earlier this year to capitalize on the economic recovery, many growth stocks have been rebounding lately as investors now bet on the economy’s solid growth prospects. Against this backdrop, we think investing in undervalued growth stocks, such as Regeneron Pharmaceuticals (REGN), Energy Transfer (ET), and POSCO (PKX), should allow investors to maximize returns in the near term. Read on.
The United States has one of the world’s fastest recovering economies, with its first quarter GDP (for three months ended March 31) increasing at a 6.4% annualized rate. Solid progress on the vaccination front and impressive job growth have been driving the country’s recovery in the second quarter. According to the back-to-normal index, the United States is currently operating at 91% of its pre-pandemic levels.
Stocks with solid growth attributes are expected to be the biggest beneficiaries of this recovery because declining unemployment and rising consumer spending have been driving a substantial rise in corporate sales and profits. The country’s annualized GDP growth expectation of 10.3% in the current quarter (ending June 30) indicates the solid growth prospects of companies that prioritize growth over all else.
However, given that many growth stocks have become expensive now, we think betting on relatively undervalued growth stocks Regeneron Pharmaceuticals, Inc. (REGN), Energy Transfer LP (ET), and POSCO (PKX) could be highly rewarding.
Regeneron Pharmaceuticals, Inc. (REGN)
REGN discovers and manufactures various medicines for serious medical disorders worldwide. The company offers a wide range of medical products including EYLEA (aflibercept), Praluent (alirocumab), ARCALYST (rilonacept), Kevzara (sarilumab), and ZALTRAP (ziv-aflibercept).
REGN is an established pharmaceutical company known for its diversified products and drug pipeline that caters to serious ailments. REGN’s revenues increased at a 14.1% CAGR over the past three years. Its net income rose at a 41% CAGR over the past three years, while its EPS improved at a 41.8% CAGR over this period. The company’s EBITDA increased at a 18.8% CAGR over the past three years.
REGN’s total revenues increased 38.3% year-over-year to $2.53 billion in its fiscal first quarter, ended March 31. Its operating profit grew 58.9% from the year-ago value to $1.11 billion, while its net income improved 78.5% year-over-year to $1.12 billion over the period. The company’s EPS increased 85.8% year-over-year to $10.09.
On June 4, REGN received FDA emergency use approval for REGEN-COV™ to treat COVID-19 patients. With this approval, this drug is expected to be widely demanded because several cases of COVID-19 are still being reported in the country. The drug is already authorized by the European Union for treating COVID-19 infections and its side effects. With an immense market reach, this drug should contribute heavily to REGN’s growth.
A $2.85 billion consensus revenue estimate for the fiscal third quarter, ending September 2021, indicates a 36.4% improvement from the same period last year. Analysts expect the company’s EPS to come in at $10.13 in the next quarter, representing a 21.2% rise year-over-year. REGN has surpassed the Street’s EPS estimates in each of the trailing four quarters.
Given the company’s immense growth prospects driven by its innovative COVID-19 treatment drug and diversified product pipeline, the stock is undervalued. In terms of non-GAAP forward P/E, REGN is currently trading at 10.83x, 55% lower than the 24.08x industry average. Its 4.39 forward Price/Sales multiple is 43.3% lower than the 7.74 industry average.
REGN gained 4% over the past six months to close yesterday’s trading session at $514.99. The stock has gained 6.6% year-to-date.
REGN has an overall A rating, which equates to Strong Buy in our proprietary POWR rating system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
REGN has an A grade for Growth and Value, and B for Quality and Sentiment. It is ranked #1 of 489 stocks in the Biotech industry.
Beyond what we’ve stated above, we have also rated REGN for Momentum and Stability. Click here to view all REGN Ratings.
Energy Transfer LP (ET)
ET has been a midstream energy leader in the United States for nearly 25 years. The company stores and transports natural gas, crude oil and refined products. ET’s segments include intrastate and interstate transportation and storage, midstream, NGL and refined products transportation and services, crude oil transportation and services. ET has an impressive growth history. Its net income rose at a 48.1% CAGR over the past three years, while its EBITDA increased at a 22.5% CAGR over this period. The company’s earnings before interest and taxes increased at a 27.7% rate per year over the past three years.
ET’s revenues increased 46.2% year-over-year to $17 billion in the fiscal first quarter, ended March 31. Its income from continuing operations grew 6,570.5% from the year-ago value to $4.07 billion. ET’s net income came in at $3.64 billion, indicating a 477.7% rise year-over-year. The company’s net income per limited partner unit increased 478.1% year-over-year to $1.21.
On June 1, ET priced a public offering of 900,000 series H preferred stocks priced at $1,000per unit. The company raised $900 million in proceeds from the offering, which it plans to use to reduce its debt burden and to fund general partnership expenses.
On April 22, ET announced a $0.1525 quarterly distribution of per common unit for the first quarter, ended March 31, 2021. The company also announced quarterly cash distributions of $0.46, $0.48 and $0.48 per Series C, D and E Preferred Units, respectively, paid on May 17.
ET is one of the major players in the oil and gas MLP space, with immense potential to grow as the oil markets rebound in the near term. However, it is a significantly undervalued stock. In terms of non-GAAP forward P/E, ET is currently trading at 6.14x, which is 48.9% lower than the 12.02x industry average. Its 0.45 forward Price/Sales multiple is 68.9% lower than the 1.45 industry average.
The Street expects ET’s revenues to increase 61.1% year-over-year to $62.77 billion in the current year. The company’s EPS is expected to increase 891.7% year-over-year to $1.9 in the current fiscal year.
ET gained 62.8% over the past six months to close yesterday’s trading session at $10.91. The stock has gained 76.5% year-to-date.
It’s no surprise that ET has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. ET has an A grade for Growth and Value, and B for Sentiment. Among the 95 stocks in the Energy-Oil and Gas industry, ET is ranked #12.
To see additional POWR Ratings for Quality, Momentum and Stability, click here.
Headquartered in South Korea, PKX is a global player in manufacturing and selling steel rolled products and plates. The Company operates through four segments--steel, trading, engineering and construction, and other.
On May 14, PKX implemented ESG policies across its supply chain, including raw materials, facilities, and resources as part of its plans to shift its business structure from a steel-oriented business to a ‘Green & Mobility’ business. This broad vision and its immediate initiatives are aligned with the PKX’s goal to become a leading eco-friendly business.
PKX’s revenues increased at a 1.3% CAGR over the past five years. Its total assets rose at a 2.2% CAGR over the past three years, while the company’s levered free cash flow increased at a 3.3% CAGR over the same period.
In terms of non-GAAP forward P/E, PKX is currently trading at 8.52x, 48% lower than the 16.40 industry average. And its forward 0.77 Price/Sales multiple is 51.1% lower than the 1.57 industry average.
PKX’s revenue increased 10.5% year-over-year to 16,069 billion KRW ($14.41 billion) in the fiscal first quarter, ended March 31. Its operating profit grew 120.1% from its year-ago value to 1,552 billion KRW ($1.39 billion). Its net earnings stood at 1,139 billion KRW ($1.02 billion), up 161.8% from the same period last year. The company’s cash balance increased 4.3% year-over-year to 39,442 billion KRW ($35.38 billion).
Shares of PKX have gained 80.7% over the past year to close yesterday’s trading session at $76.37. The stock gained 22.6% year-to-date.
PKX has an overall A rating, which equates to Strong Buy in our proprietary rating system. PKX has a grade of A for Growth and Value, and B for Stability and Momentum. It is ranked #3 among the 33 stocks in the A-rated Steel industry.
Click here to view additional PKX Ratings.
REGN shares were trading at $507.12 per share on Tuesday afternoon, down $7.87 (-1.53%). Year-to-date, REGN has gained 4.97%, versus a 13.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.