Stocks near or at their 52-week highs are rarely compelling buys. These highfliers, after all, generally tend to take a breather upon reaching new heights or, worse still, reverse course.
With this theme in mind, we asked three of our investors which stocks they think might be the exception to this overall trend. They suggested Clovis Oncology (CLVS), Microsoft (MSFT -1.52%), and Mastercard (MA -0.21%). Read on to find out why these stocks might still be worth buying right now.
Image source: Getty Images.
A biotech with room to grow
George Budwell (Clovis Oncology): Clovis' shares have been rocketing higher, thanks largely to the accelerated Food and Drug Administration approval of its advanced ovarian cancer drug, Rubraca, late last year. However, the biotech's shares also got a sizable boost from this same drug's recent late-stage readout as a later maintenance treatment for women with platinum-sensitive ovarian cancer who have responded to their most recent platinum therapy. Taken together, these two catalysts have propelled Clovis' shares upward by an impressive 539% in just the last 12 months:
CLVS Total Return Price data by YCharts.
Despite this enormous level of appreciation in an exceedingly short time span, Clovis' stock is arguably still undervalued for two key reasons. First, the biotech's shares are only trading at about 4.5 times Rubraca's lower-end peak sales estimate of roughly $1 billion as a treatment for advanced ovarian cancer. That's not super cheap, but also far from expensive for a promising early-stage cancer company. And some analysts have suggested that this drug could eventually generate far higher peak sales on the order of $1.8 billion.
Second, Clovis' present valuation arguably doesn't reflect its potential as a buyout candidate. Cancer drugs have been garnering mind-boggling premiums in buyout situations over the past few years, and this trend is only expected to grow stronger as several titans of the industry look to replenish their aging product portfolios. Put simply, it wouldn't be shocking if Clovis was taken out at hefty premium compared to where its shares are trading today.
All told, Clovis' growth trend appears primed to keep rolling due to Rubraca's massive commercial potential.
A company undergoing a successful transformation
Keith Noonan (Microsoft): The time-tested adage "buy low and sell high" suggests that investors should be cautious about initiating a position when a stock is trading at the top of its 52-week range. You should probably be even more cautious when a stock is priced at lifetime highs, but, in Microsoft's case, I think it has the makings of a company that can continue to deliver wins beyond its current record valuation.
The software giant's stock has soared thanks to increasing demand for its cloud services and the successful transition of its Office and Dynamics software suites to subscription-based models, and shares could continue to rise now that the company is better positioned to benefit from key tech trends.
Thus far, Microsoft has prioritized growing the reach of its cloud platform, but it should be able to improve its operating margin down the line, which could have a big impact on earnings. Recurring revenue from Office 365 and Dynamics 365 also look to provide sustained tailwinds, and there are opportunities to slow or reverse the erosion of Windows by making it a leading Internet of Things operating system and to benefit from emerging categories like mixed reality.
The company trades at roughly 22 times forward earnings estimates, which might not look cheap but it's not unreasonable for one in the software space that has strong competitive advantages, a rock-solid balance sheet, and a 2.2% dividend yield. Microsoft is exciting again, and despite pricing highs, its stock has the potential to be very rewarding for long-term investors.
Charge ahead with this highflier
Dan Caplinger (Mastercard): People in the U.S. take credit and debit cards for granted, but throughout much of the world, most transactions still involve using cash. That gives Mastercard a huge growth opportunity, and the card giant has taken full advantage by emphasizing the value of international markets to its overall strategy for global dominance.
Mastercard isn't the biggest player in the worldwide card market, but it has made a number of moves designed to help get it there. Innovations like using artificial intelligence and biometrics to integrate into a security platform that can validate transactions and reduce fraud give Mastercard an edge over its competitors, and with recent new access to ACH electronic payments networks, the card company can now offer its banking customers a greater range of potential solutions than it could using solely its own proprietary payment network.
Even Mastercard itself thinks that its stock is still a good value. The company spent roughly $1 billion to buy back about 9 million shares in the first quarter of 2017 and followed that up with another 2.4 million share purchase in the month of April. With global economies starting to pick up steam, Mastercard should be able to sustain its positive momentum and enjoy increasing penetration of untapped markets across the globe.
