The stock market rallied significantly in 2017, and that's got investors wondering what the best investments might be for 2018. Although there are plenty of intriguing stocks that might be worth owning, I think Galapagos (NASDAQ:GLPG), Diamond Offshore (NYSE:DO), and Oracle (NYSE:ORCL) are among the most promising to buy now.

Big catalysts ahead

Galapagos is arguably the riskiest stock on this list because it doesn't have any products currently on the market. Therefore, it has no revenue or earnings. 

The numbers 2018 sit on top of and in front of a $100 bill.

IMAGE SOURCE: GETTY IMAGES.

However, don't let that scare you away from this up-and-coming, clinical-stage biotech. After all, Galapagos has a lot of news coming that could make it one of the industry's best-performing stocks to own in 2018.

Specifically, Galapagos expects results from key studies in two major programs in 2018 and 2019. One of these programs is a collaboration project with Gilead Sciences (NASDAQ:GILD) on filgotinib, a treatment for autoimmune diseases, including rheumatoid arthritis. The other is a collaboration with AbbVie Inc. on cystic fibrosis drugs.

Results from a pivotal study evaluating filgotinib in rheumatoid arthritis are anticipated this year, and if that data is good, it could pave the way for filgotinib to become a billion-dollar blockbuster. Currently, the market for rheumatoid arthritis medication tops $16 billion annually, and as a result, existing autoimmune disease drugs are among the bestselling drugs on the planet.

Data is also on deck this year from a triplet combination therapy that Galapagos and AbbVie are developing to compete against Vertex Pharmaceuticals. Galapagos has already reported positive proof-of-concept data in cystic fibrosis, and if this trial is a success, too, it could open the door to sales in this blockbuster indication.

Galapagos stands to benefit handsomely from both of these projects. It will split profits on filgotinib with Gilead Sciences in eight European markets, and it will get 20% to 30% royalties on U.S. sales, plus milestone payments that could eclipse $1 billion. Gilead Sciences already owns more than 10% of Galapagos, so there's a chance of a merger and acquisition (M&A) sometime down the line, too.

Its relationship with AbbVie is similarly attractive. AbbVie will pay it royalties ranging from 15% to 20% on sales, plus up to $600 million in milestones. Galapagos can also choose to split profit with AbbVie in some European countries.

Overall, Galapagos has a research and development (R&D) pipeline that includes drugs targeting $80 billion in annual revenue, and its got pivotal insight arriving over the next year. I think it's a top stock to consider buying in risk-tolerant portfolios.

A business person in a suit with arms raised toward the sky stands beside an oil barrel with money shooting out of it into the air.

IMAGE SOURCE: GETTY IMAGES.

A turnaround emerges

Offshore oil and gas exploration is costly. As a result, oil and gas producers shifted their spending away from offshore projects to land-based projects when commodity prices started falling in 2014. Lately, however, oil prices are rebounding, and I'm optimistic that offshore spending will bounce back. If I'm right, then offshore-oriented drilling companies, including Diamond Offshore, will benefit.

There are already signs that a corner is turning. Diamond Offshore posted its best year-over-year growth in three years last summer, and in the third quarter, its sales climbed to $366 million from $349 million last year.

The company's wheelhouse is the ultra-deepwater market, and because that market is costliest, it tends to lag recovery in the jack-up market. Nevertheless, ultra-deepwater offers greater optionality for upside when pricing power returns, and that suggests Diamond Offshore's shares could catapult higher if demand increases this year.

Currently, deepwater utilization of the company's fleet is only 61%. Despite that modest figure, Diamond Offshore still generated $366 million in free cash flow and earned $1.21 per share over the past 12 months. Given that Diamond Offshore's trailing-12-month free cash flow was $1 billion, its earnings per share was above $7, and its stock was trading in the $90s in 2010, there could be a lot of running room.

DO Free Cash Flow (TTM) Chart

DO Free Cash Flow (TTM) data by YCharts.

Cashing in on the cloud

Oracle helps over 430,000 customers manage and analyze data and hardware, and it does so with on-premise, hybrid, and cloud-based solutions. Because its products facilitate efforts to manage businesses more efficiently, Oracle is positioned perfectly to profit from rising demand for productivity software.

While some cloud-software companies have embraced specific niches, Oracle works with most of the biggest companies in the world because it offers soup-to-nuts solutions that cut across resource planning, performance management, human capital decision-making, the supply chain, and customer service.

In the past, Oracle's products were deployed within cordoned off enterprise data centers, but increasingly, enterprises are realizing that there are big productivity benefits that are associated with hybrid and cloud-based software solutions. As more Oracle customers make the switch, the company should enjoy a steady stream of high-margin subscription revenue, especially since enterprises that go to the cloud often buy more Oracle products. (The company offers over a thousand software-as-a-service applications.)

We're already seeing that happen. In December, Oracle reported that fiscal second-quarter cloud revenue grew 44%, to $1.5 billion, due to cloud software-as a service revenue soaring 55%, to $1.1 billion, and cloud platform as-a-service and infrastructure-as-a-service revenue improving 21%, to $396 million. Cloud plus on-premise software increased 9%, to $7.8 billion, and overall sales grew 6% companywide, to $9.6 billion.

Even better, Oracle's profit is increasing even faster. Non-GAAP net income grew 16%, to $3.0 billion and non-GAAP earnings per share (EPS) increased 14%, to $0.70 in the quarter.

Fortunately, that top- and bottom-line momentum should continue in 2018. According to CEO, Mark Hurd, Oracle expects to sell around $2 billion in new enterprise software-as-a-service application cloud subscriptions over the coming four quarters. Hurd claims that outpaces any of its competitors. 

As for the future, founder and CTO Larry Ellison, who still owns a quarter of Oracle's shares and is one of the wealthiest people on the planet, says the company's plans include an artificial intelligence (AI) database requiring no human labor to administer it. He claims that the cost of running that database in Oracle's cloud will be less than half the cost of running a database in Amazon's cloud, a poke that demonstrates that Oracle plans to fight fiercely to win business.

Oracle's other investments in machine learning, augmented reality, the blockchain, and the Internet of Things should help drive its financials higher over time, too.

Even better, investors can buy Oracle's shares at a discount to other big-cap, cloud-software stocks. For example, Oracle has a lower price to earnings (P/E) ratio, price-to-sales ratio, and price-to-book ratio than Microsoft (NASDAQ:MSFT), which has seen its shares jump 43% in the past year on optimism surrounding its cloud business.

  Oracle Microsoft
Trailing P/E ratio 22.3 33
Forward P/E ratio 16.3 24.4
P/E-to-growth ratio 1.96 2.5
Price-to-sales ratio 5.5 7.75
Price-to-book ratio 3.85 8.01

Data source: Yahoo!Finance.

If Oracle can leverage its clients' shifts to the cloud for revenue and profit growth -- and I think it can -- then it should have plenty of financial flexibility to return money to investors. As evidence of this potential, Oracle boosted its buyback authorization by $12 billion in December.

Ultimately, there's no telling where shares in these three companies will trade in 2018, but given the potential catalysts that could send these stocks higher, I think Galapagos, Diamond Offshore, and Oracle are promising stocks that are worth considering.

 

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Todd Campbell owns shares of Gilead Sciences and Microsoft. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool owns shares of Oracle. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.