Past performance doesn't guarantee supersized gains (or losses) in the future, but investors who took the risk and bought these three stock market darlings five years ago are undeniably smiling every time they look at their account statement. Shares in Medivation (MDVN), Acadia Pharmaceuticals (ACAD 1.66%), and LendingTree (TREE -2.51%) have all returned over 1,000% in the past five years. Is there still time to buy shares in these top performers?
No. 1: A megadeal takes this one out of contention
Pfizer, Inc. (PFE 3.59%) just won the high-stakes bidding war to buy Medivation Inc. last week, so unless a surprise bidder emerges, this one is off the table for consideration by new investors.
Pfizer is paying all cash for Medivation, so Medivation's performance from here is capped at the $81.50-per-share buyout price, but that doesn't mean Medivation can't help us spot the next top-performing biotech.
Medivation's success was due to the rapid adoption of Xtandi, a prostate cancer drug that came on the scene in 2012. After its launch, Xtandi quickly became the market share-leading drug used in post-chemotherapy patients, and after the Food and Drug Administration approved its use in 2014 for the pre-chemotherapy setting, sales took off. This year, industry watchers think Xtandi's sales could reach $2.8 billion, making it the sixth best-selling cancer drug on the market.
Even though Medivation splits Xtandi's profit with its partner, Astellas, Pfizer was still willing to pay more than 14 times the company's 2016 sales forecast to acquire it. Perhaps that tells us not to give up on companies making game-changing drugs that target big indications. After all, investors who sold Medivation early on missed an eye-popping 1,883% return over the past five years.
No. 2: Targeting a large, unmet need
Acadia Pharmaceuticals' 2,396% return over the past five years shows that companies don't have to be developing cancer drugs to reward investors with outsized returns.
Acadia Pharmaceuticals markets Nuplazid, a newly approved treatment for hallucinations and delusions experienced by Parkinson's patients. Sadly, there's no cure for this progressive disease and that means that the market for Nuplazid is likely to increase.
An estimated 40% of the more than 4 million people with Parkinson's disease globally suffer from Parkinson's disease psychosis and Nuplazid is the first FDA-approved drug to specifically treat it. The big unmet need and lack of treatment options have fueled investor enthusiasm. However, there's no guarantee that this drug will be a top seller and that means that this is a risky stock.
Nuplazid became available at the end of May, so the jury's out on whether this drug will be a top seller. If it is, then Acadia Pharmaceuticals could still reward investors handsomely. If it isn't, then shares could tumble. That kind of uncertainty doesn't make it easy to sleep at night, but if you're a risk tolerant investor, then Acadia Pharmaceuticals' might still be worth buying.
No. 3: Is the housing market ramping up or running out of steam?
That's the big question investors will need to answer before deciding whether there's more upside left ahead for LendingTree. An improving economy that's boosting loan volume has led LendingTree's shares to return a meteoric 1,911% in the past five years.
During that period, LendingTree's matchmaking of borrowers and lenders has resulted in a quadrupling of revenue, including a 71% year-over-year jump in the second quarter. Importantly, as revenue has increased, so has LendingTree's profitability. Over the past 12 months, LendingTree has generated over $50 million in net income, which is far better than the trailing-12-month losses of over $50 million recorded back in 2012.
One of the biggest drivers of LendingTree's success has been rising demand for mortgages. Last quarter, record mortgage revenue of $56 million accounted for 59% of the company's sales.
The direction of interest rates and the ability of the economy to create higher-paying jobs will determine if mortgage demand can continue growing. So far, wages offer little evidence that loan demand is about to collapse. In July, average hourly wages improved to $25.69 from $25.03 a year ago.
The uptick in wages helped fuel a 84% year-over-year increase in total loan requests in Q2. Overall, borrowers made 3.6 million requests in the quarter.
Overall, LendingTree's business appears to be humming along, but we're not so far removed from the Great Recession to fail to remember that investors may not discover that loan demand has soured until it's too late. For that reason, LendingTree is an intriguing yet risky stock to buy, too.