Sometimes buying the best value stocks takes guts. After all, when the market punishes a stock so severely that it drives its price into value territory, it's often for a reason.
But, the market isn't perfect, and three of our writers think there are stocks out there that are worth way more than their current valuations. If you're bold enough to handle a little uncertainty in hopes of outperforming the market, you may just find tremendous returns from value stocks Celldex Therapeutics (NASDAQ:CLDX), CoreCivic (NYSE:CXW), and Seaspan (NYSE:SSW).
A deeply undervalued pipeline
Kristine Harjes (Celldex Therapeutics): After the hugely disappointing clinical trial failure of its brain cancer treatment candidate, investors fled from biotech Celldex Therapeutics. Share prices have cratered 90% since March 2015, as most investors lost hope for the company. What they forgot, though, was that Celldex still has some promising drug candidates in its pipeline. And -- value investors rejoice -- their collective potential more than justifies the current market cap of just under $400 million.
The baby that was thrown out with the bathwater was twofold: Celldex's opportunity centers on a pair of drugs now in stage 2 trials. One of them is called glembatumumab vedotin, or "glemba" if you want to spare yourself the tongue twist. It's currently being studied in breast cancer and metastatic melanoma, and results have been promising so far. If this monoclonal antibody treatment makes it to market (and, as a reminder, the odds are long for any drug to make it through phase 3 and FDA approval) it could reach peak sales of well over $1 billion annually. Investors will get a look at data later this year from the Metric trial, which is studying glemba as a treatment for triple negative breast cancer.
The other drug in Celldex's pipeline that I'm keeping an eye on is varlilumab ("varli"), which is being studied in head and neck, ovarian, colorectal and renal cell carcinomas, and glioblastoma. The next catalyst for varli will come in June, when Celldex expects to report data from a trial being run with the hugely successful Opdivo (a Bristol-Myers Squibb drug). Combination therapies are the key to the next generation of cancer treatments, and varli has the opportunity to tack on to the success of drugs like Opdivo and become a blockbuster itself.
Celldex sports $167 million in cash and equivalents on its balance sheet, and has no long-term debt. The company is only losing around $25 million per quarter, and partnerships with companies like Roche and Bristol-Myers Squibb are bolstering its cash balance. Management expects to have enough cash to finance operations through 2018, so there's no immediate risk to shareholders that the company won't be able to keep the lights on.
When you consider that biotechs are generally valued at around three times the peak sales of their lead drug candidates, Celldex's market cap is more than justified by either glemba or varli. This is a risky stock, so it makes sense that there's some uncertainty priced in. But with a market cap of just a fraction of the peak sales potential of just one of its two key pipeline candidates puts this stock deeply in bargain-bin territory. Admittedly, it will be a while before the thesis for Celldex proves out. if it does. However, shares right now are so deeply discounted that bold value investors would be wise to take a closer look.
Locking up sustainable total returns
Rich Duprey (CoreCivic): A stock that has nearly tripled in value in six months isn't usually going to get picked as a "value" stock, but CoreCivic isn't your usual company.
As the country's largest private prison operator, CoreCivic enjoyed a tremendous boost from the election of Donald Trump as president. Where his predecessor's Justice Department had directed government agencies to develop plans to phase out the use of private prisons, Trump's policy of cracking down on illegal immigration -- and the need for facilities to hold those caught -- caused a stock surge for CoreCivic and industry peer GEO Group.
In addition, Attorney General Jeff Sessions has struck a get-tough-on-crime posture, going so far as to say prior leniency shown toward victimless crimes like marijuana use and possession would no longer be tolerated. With government operated prisons already filled to overflowing -- the Bureau of Prisons prisoner population is already 23% over capacity -- new ones will be needed. Revenue-constrained state and local governments would have a hard time finding funds to build new prisons in their budgets, let alone getting them sited without raising storms of controversy.
However, CoreCivic has seven core facilities that are currently idle with a design capacity of 8,300 beds, plus two more non-core facilities with another 440 beds available. And, the BOP recently chose not to renew its contract on yet one more facility that offers more than 1,400 beds. It's clear CoreCivic has plenty of capacity that the government may very well need, which gives the company plenty of opportunity for additional growth.
Yet is CoreCivic a value stock? The prison operator is structured as a real estate investment trust, and it sports a P/E ratio of 18 that is below the market's average multiple of 25 -- and well below the average REIT's P/E of 91. Similarly, its price relative to next year's anticipated earnings is also well below industry and market averages. Coupled with an annual dividend of $1.68 per share that's currently yielding around 5%, CoreCivic offers value investors a solid investment that could provide a powerful total return to one's portfolio.
This beaten down shipping company is poised for a strong rebound
Brian Feroldi (Seaspan): Investors in the shipping industry have taken it on the chin over the last few years. Years of overbuilding caused shipping rates to plunge, which in turn put the hurt on the shipping lines. Things got so bad that Hanjin -- a major container line out of South Korea -- was forced to declare bankruptcy.
That backdrop caused investors to flee from Seaspan's stock, something that took me by surprise since the company's massive fleet of vessels is leased out to major liner services under long-term, fixed-fee charters. I figured that the company's contracts would help to keep it safe from the storm.
It turns out I was wrong. Hanjin was one of Seaspan's customers, so the bankruptcy has had an impact on its financials. It was also forced to recharter some of its boats at current market rates, which are terrible. The combination has caused Seaspan's revenue to dip and for profits to take a big hit. That lead the company's board to cut its massive dividend.
Thankfully, the industry at large has pulled back on new ship building activity and has increased its scrap rate. Those measures have helped charter rates to recover. That's been great news for Seaspan, and if charter rates continue to rise from here, the company's stock could certainly be poised to recover.
Seaspan's stock isn't for the faint of heart, but its reduced dividend yield of 8% looks sustainable, and there is ample opportunity for substantial share price appreciation if the shipping market has truly bottomed. That makes Seaspan a great stock for bold value investors to get to know.
Brian Feroldi owns shares of Seaspan. Kristine Harjes owns shares of Celldex Therapeutics. Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Celldex Therapeutics and Seaspan. The Motley Fool has a disclosure policy.