Although it's never a particularly good strategy to blindly follow other investors, the activity of elite investors like Carl Icahn and Warren Buffet (which is reported quarterly) can provide worthwhile investing ideas. Armed with this insight, we asked three of our contributors which stocks they think might be worth taking a cue on from the smartest investors.
They recommended Idera Pharmaceuticals (NASDAQ:IDRA), Bristol-Myers Squibb (NYSE:BMY), and Apple (NASDAQ:AAPL). Below, they outline their reasoning for why they think these three stocks may be worth buying right now.
The Baker Brothers are gobbling up this tiny biotech
George Budwell (Idera): Julian and Felix Baker seemingly have the Midas touch when it comes to picking clinical-stage biotechs. So when their aptly named hedge Baker Bros. Advisors fund picked up another 3.25 million shares of Idera Pharmaceuticals in the fourth quarter of 2016, I stood up and took notice.
Although Idera has three drug candidates under development at the moment, the company's most important value driver is IMO-2125. IMO-2125 is a TLR9 agonist designed to be used in combination with either Bristol-Myers Squibb's Yervoy or Merck's Keytruda in patients with advanced skin cancer who fail to respond to checkpoint inhibitor monotherapy.
At a recent conference, Idera reported that IMO-2125 showed some encouraging synergistic effects with Yervoy in an early stage study, warranting further development. In response, multiple analysts ratcheted up their one-year price targets for Idera's shares, implying an upside potential of 139% from current levels.
The basic issue is that IMO-2125 may be able to grab an accelerated regulatory approval based on the need for alternative treatment options for skin cancer patients who don't respond to checkpoint inhibitors -- combined with the drug's promising early results.
If so, Idera could break into the commercial-stage biotech population within the next two years and perhaps generate hundreds of millions in sales in the process. So Idera may still be grossly undervalued, with a current market cap of $371 million despite its shares gaining 66% so far this year.
That said, the Baker brothers have periodically been dead wrong about clinical-stage biotechs in the past, and encouraging early stage results often fail to translate into viable commercial products, especially among oncology drug candidates. As such, investors certainly shouldn't ignore the serious risks associated with this stock, even if the Baker brothers did dramatically up their stake in the most recent quarter.
Can Icahn do it again?
Cory Renauer (Bristol-Myers Squibb Co): Carl Icahn's ability to sniff out opportunity in biopharma could make Bristol one of the best cancer drug stocks you can buy this year. He scooped up shares of ImClone Systems after an insider trading scandal sent them plunging. As board chairman, he helped orchestrate its sale to Eli Lilly at a steep premium.
More, recently a manufacturing glitch led Genzyme shares low enough to stir Icahn's interest. After taking on a huge stake in the company, he helped negotiate a deal with Sanofi, to Genzyme shareholders' immense benefit.
Bristol-Myers Squibb got on Icahn's radar following a clinical trial misstep with Opdivo. Although Opdivo is approved for the treatment of advanced lung cancer in cases where previous lines of therapy have failed to halt its progression, it failed to outperform standard chemotherapy in the first-line setting.
The clinical setback was significant, but I don't think Opdivo sales, or Bristol's bottom line, are finished climbing. The blockbuster cancer drug makes it hard for tumors to shut down an immune system attack, an effective approach that led to the drug generating a stunning $3.77 billion in sales last year. However, with a $92 billion market cap at recent prices, selling Bristol for a premium would be much harder to pull off than Icahn's previous triumphs.
Whatever the activist investor's intentions may be, Bristol's shares look like a relative bargain. The stock has been trading at just 18 times forward earnings estimates despite expectations of 14.5% annual earnings growth over the next five years. While a mega-merger at a premium would be a nice cherry on top, simply meeting consensus growth expectations would make this stock a pretty sweet deal.
Buffett bets big on this tech titan
Chuck Saletta (Apple): Warren Buffett's Berkshire Hathaway added over 42 million shares of tech titan Apple in its most recent disclosure filing period. Buffett is a renowned value investor and known for avoiding investments in technology companies, so that big bet on a tech titan is a bold move.
Apple is something of a challenge for value-oriented investors. On one hand, its shares don't look expensive based on backwards-looking valuation metrics, especially when you consider its exceptionally strong balance sheet and the cash and short-term investments piled up there. On the other hand, its growth opportunities are tied to the hardware upgrade cycle -- particularly regarding its iPhones.
That reliance on an upgrade cycle makes Apple's growth prospects vulnerable to consumers who don't feel the new features are worth the cost of an upgrade. It also puts Apple at risk of competition that may be able to leapfrog Apple's own innovations or offer similar features at lower prices. That makes forecasting Apple's future growth -- a key driver of most valuation models -- cloudier than it would be with a company with a less innovation-dependent repeat purchase cycle.
Still, a vote of confidence in the form of a large share purchase from a value investing maven like Warren Buffett is a sign that Apple has substantial branding and staying power. Only the future will tell whether Apple can deliver the growth it needs to justify its market price today, but if Buffett is confident enough in that growth to invest, who am I to argue?
Chuck Saletta has no position in any stocks mentioned. Cory Renauer has no position in any stocks mentioned. George Budwell owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.