Wall Street can unfairly punish companies from time to time. When that happens, it can be a great time for opportunistic investors to buy great businesses at bargain prices.
So which stocks do we think have been unfairly beaten down right now? We asked a team of Motley Fool investors to weigh in, and they called out Celgene (NASDAQ: CELG), Brookfield Infrastructure Partners (NYSE: BIP), and Universal Display (NASDAQ: OLED).
Down but definitely not out
Keith Speights (Celgene): I understand why many investors have thrown in the towel on Celgene. The big biotech saw the potential for a blockbuster Crohn's disease drug go up in smoke in 2017 after GED-0301 flopped in a late-stage clinical study. Then Celgene followed up earlier this year with a big blunder in its regulatory filing for ozanimod in treating multiple sclerosis (MS), resulting in the Food and Drug Administration rejecting the application. But these setbacks, while significant, don't undermine the rest of the story for Celgene. And it's a really good story.
Celgene's top product, Revlimid, ranked as the No. 2 best-selling drug in the world last year. Sales for the blood-disease drug continue to grow. Some might worry about the potential for early entrants of generic competition for Revlimid. However, I expect Celgene to settle with prospective challengers just as it has already done with Natco Pharma in a deal that keeps generic alternatives to Revlimid off the U.S. market until 2022 -- and then only at limited volumes.
Meanwhile, Celgene has two other drugs with strong sales momentum: Pomalyst and Otezla. Despite the delay for ozanimod, the biotech still expects to win approval for the drug and plans to file again in early 2019. Celgene's pipeline also includes several other potential blockbusters, including blood-disease drug luspatercept and cancer cell therapy liso-cel (formerly known as JCAR017).
Celgene stock trades at less than 7.7 times expected earnings. But the biotech should be able to grow earnings by nearly 20% annually. Celgene is down now, but it's definitely not out.
Headwinds don't always change the long-term story
Neha Chamaria (Brookfield Infrastructure Partners): It's hard to see why the market has soured on Brookfield Infrastructure Partners. Despite consistently strong operational performance, shares of the infrastructure asset company have dropped nearly 15% year to date as of this writing, pushing its yield to a hefty 4.9%.
Investors apparently fear a slowdown in Brookfield's growth, going by some of the things that management said during its last earnings call -- the most prominent one being its intention to build up liquidity during these volatile times. In other words, the possibility that the company will likely go slow on investing didn't go down well with the market. Potential headwinds in Brazil and Australia are added concerns.
Brookfield buys assets in transport, utilities, energy, and telecommunications at distressed prices to turn them around profitably and resell when mature, to reinvest proceeds into other acquisitions. But it's better for any business to be cautious and proactive than be aggressive and make costly mistakes.
Sure enough, the growth in Brookfield's funds from operations could decelerate in the near future, but the company's dividends should still be safe and grow between 5% to 9% annually, as management is aiming for. Also, it's not that the company isn't doing anything with all the cash at hand: Just days ago, Brookfield struck a deal with AT&T to acquire several internet data centers in exchange for $1.1 billion.
At the end of the day, a major chunk of Brookfield's cash flows should still come from regulated and long-term contracts and support dividend growth, making it a low-risk play even during uncertain times.
Focus on the big picture
Brian Feroldi (Universal Display): There's no doubt that the sentiment around Universal Display has shifted dramatically since the start of the year. Shares of the organic light-emitting diode (OLED) specialist have dropped by more than 60% since January.
What can explain such a dramatic fall? I think you can place the blame squarely on the company's guidance for 2018. Universal Display's revenue grew 69% to $335 million in 2017. However, the company is only projecting revenue in 2018 between $280 million and $310 million. That's quite a reversal of fortunes, so it seems understandable that growth-focused investors have been dumping the stock.
However, a little bit of context helps to explain management's downbeat guidance. First, OLED manufacturers are investing heavily in their capacity in the first half of 2018. That's putting temporary downward pressure on the demand for materials like the ones that Universal Display provides. That pressure is expected to abate in the second half of the year. Second, the company recently switched to a new accounting standard that is depressing reported revenue. The year-over-year numbers look much better when you allow for the change.
Overall, I think there is ample reason to believe that Universal Display is in a far stronger position than the headline numbers would suggest. With growth expected to resume as we head into 2019, I think that right now is a great time to pick up a few shares of this beaten-down market leader.
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Brian Feroldi owns shares of Celgene and Universal Display. Keith Speights owns shares of Celgene. Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Celgene and Universal Display. The Motley Fool has a disclosure policy.