Last year, Bank of America/Merrill Lynch released their analysis of an interesting study that examined the performance of growth stocks versus value stocks over the 90-year period from 1926 to 2016. The results showed that value stocks have outperformed growth stocks, with an annual average gain of 17%, versus growth stocks' 12.6%. 

However, since the end of the Great Recession, we've seen a notable reversal, with growth stocks outperforming value stocks by a notable margin. Historically low interest rates have played a big role in this switch, since growth companies have been able to borrow at a cheap cost to expand their operations or acquire new businesses. With the Federal Reserve walking on eggshells when it comes to increasing interest rates, it looks as if growth stocks could continue to outperform value stocks for years to come.

An investor circling a stock symbol in a financial newspaper.

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My top stock to buy in August

If you're looking for a possible growth stock this August to reignite your portfolio for the years ahead, my top stock to consider is biotech company Intercept Pharmaceuticals (ICPT).

Now, let's get the obvious out of the way before value investors rake me over the coals: Yes, Intercept Pharmaceuticals is losing a lot of money right now. During its recently reported second-quarter results, the company wound up announcing a net loss of $86.6 million, which is more than the $77.3 million it lost in the prior-year quarter. In terms of EPS, Intercept's Q2 loss came in at $3.46, which was $0.17 narrower than Wall Street's expectations but still an eye-popping figure for a company that was pushing a $3 billion valuation two weeks ago. Since its second-quarter report was released, Intercept's stock has lost almost 30% of its value.

But there are plenty of reasons to be excited about the future, which revolves around Ocaliva.

Ocaliva is currently approved in one indication, primary biliary cholangitis (PBC), which Wall Street believes could have peak sales potential of around $300 million. During the second quarter, Ocaliva generated $30.4 million in sales, up nicely from the $19.6 million recorded in the sequential first quarter. On an extrapolated basis, Ocaliva appears to be on track to generate in the neighborhood of $125 million in sales this year.

A lab researcher examining a test tube in her hand.

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Intercept is going after the elephant

But make no mistake about it: PBC is just icing on the cake for Intercept. The "cake" in question here is nonalcoholic steatohepatitis, or NASH, also known as fatty-liver disease, which can lead to cirrhosis of the liver, liver cancer, or even death, and it's expected to become the leading cause of liver transplants by next decade. It affects about 2% to 5% of the U.S. adult population, and there are no drugs currently approved by the Food and Drug Administration to treat NASH. A first-in-class NASH treatment would probably rake in billions of dollars annually within the first couple of years of being approved.

Intercept's phase 3 Regenerate trial will analyze the impact Ocaliva has on treating NASH, with a full readout expected in the first half of 2019. The protocol for the study was altered this past February in a favorable manner for Intercept. Rather than having two hardline co-primary endpoints, Regenerate's protocol was altered such that Ocaliva could reach one of two endpoints and still be considered a success. These co-primary endpoints are fibrosis improvement and/or NASH resolution. Obviously, hitting both would be a major win for Intercept's lead drug, and it'd probably make Ocaliva the go-to NASH treatment.

The reason investors should be confident heading into this pivotal phase 3 study is that the Flint phase 2b study involving Ocaliva for NASH demonstrated statistically significant results back in early 2014. A more detailed readout of the Flint data in March 2015 showed encouraging effects on the highest-risk NASH patients. Ocaliva-treated patients were more than 3 times as likely (18% vs. 5%) to achieve NASH resolution relative to the placebo, and improvement in liver fibrosis by at least one stage was nearly double that of the placebo (39% vs. 21%). Fewer Ocaliva-treated patients also experienced fibrosis progression than the placebo (17% vs. 29%).

In midstage studies at least, Ocaliva worked wonders.

A doctor consulting with a female patient about her test results.

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The bounty Intercept is chasing

You might be wondering what sort of treasure is waiting at the other end of the tunnel should Ocaliva be successful in Regenerate. While estimates vary wildly on Wall Street, a first-in-class NASH drug should have the potential to generate anywhere from $3 billion to $9 billion in peak annual sales. This includes its potential with PBC, too.

Looking into the crystal ball, Wall Street is forecasting nearly $760 million in full-year sales by 2020, and a jump to more than $8 per share in profits by then. Assuming the company generates $3 billion annually from Ocaliva, and a somewhat normal multiple of 2.5 to 3 times peak annual sales is given to Intercept, it would have at least 200% to 300% upside from its current levels. What's more, it would probably be generating, in my best guess, around $40 in annual EPS.

Again, this assumes Ocaliva breezes through Regenerate and is the first to market, but this isn't a guarantee. Phase 3 studies can still surprisingly fail, and Ocaliva isn't the only drug in development to treat NASH. Genfit is working on a competing treatment in the Resolve-It phase 3 trails, with the company expecting to file for a new drug application perhaps as soon as the fourth quarter of 2018. Efficacy could come into play between these two companies as well.

In the interim, Intercept is set to continue to deliver losses amid higher revenue from PBC sales. But any significant dip in the company's stock from short-sighted investors exiting their positions, as has happened over the past two weeks, could be all the reason you need to dig in and hang tight for Regenerate's top-line results in first-half of 2019.