The stock market is the most effective way to predictably generate wealth over the long term. But to find the market's best stocks, sometimes you need to look where other investors aren't.
To that end, we asked three top Motley Fool investors to each pick a stock that they believe Wall Street is overlooking. Read on to learn why they chose Boston Beer (NYSE:SAM), Celgene (NASDAQ:CELG), and Core Laboratories (NYSE:CLB).
Cheers to this ongoing turnaround
Steve Symington (Boston Beer): It's no mystery why Wall Street has essentially poured shares of Boston Beer onto the floor over the past few years. Rising competition and an extended slowdown in the craft-beer market have left the stock trading more than 40% below its all-time high set in early 2015.
That said, the maker of Samuel Adams and Angry Orchard has also rebounded nicely from last year's lows, particularly given improving trends for depletions -- an industry measure for how fast Boston Beer's products travel from warehouses to consumer outlets -- along with the relative outperformance of its smaller Twisted Tea and Truly Spiked & Sparkling brands, and the success of operational efficiency initiatives.
Boston Beer certainly still has work to do to return its most popular brands to sustained, profitable growth -- something it hopes to achieve through continued brewing innovation and more pointed omni-channel marketing campaigns. To that end, last month it also announced it had hired Dave Burwick, the former head of Peet's Coffee and longtime Boston Beer board member, to take the helm from retiring CEO Martin Roperin in the second quarter.
Of course, it remains to be seen how the change in leadership will affect Boston Beer's strategy. But considering Peet's Coffee found a way to significantly increase its own revenue and sales in another crowded market, you can be sure investors will be watching closely to see if he can do the same for Boston Beer.
But with a less than 2% share of the U.S. beer market as of last quarter, it won't take much to move the needle. When that happens, I think the market will be caught off guard to the delight of patient, long-term Boston Beer shareholders.
A unique value in a pricey industry
Sean Williams (Celgene): I'm not entirely certain what Wall Street is thinking, but biotech blue chip Celgene is looking more and more like a bargain with each passing day.
Celgene's recent issues can be summed up by a slightly reduced long-term sales and profit forecast (Celgene has been providing a 2020 forecast for years), weaker-than-expected sales of anti-inflammatory Otezla, and skepticism surrounding its $9 billion acquisition of CAR-T cancer-drug developer Juno Therapeutics (NASDAQ:JUNO). Of course, most of these concerns focus on the short term and neglect the factors that have made Celgene so successful.
To begin with, multiple myeloma drug Revlimid continues to shine. It generated $8.19 billion in worldwide sales in 2017, representing a 17% increase in year-over-year sales. Even though Celgene has incredible pricing power, demand is what primarily drove growth. Revlimid is seeing improved market share, as well as longer duration of use. Not to mention that better diagnostic technology, along with a growing population, has led to a greater number of multiple myeloma diagnoses.
Don't forget that Revlimid's cash flow is essentially secure all the way through Jan. 31, 2026. Celgene settled with a handful of generic-drug makers in December 2015, allowing a relatively small number of generic Revlimid capsules onto the market beginning in March 2022, but keeping a flood of generics off the market until 2026. By forging this deal, Celgene secured a decade's worth of substantial cash flow from its cream-of-the-crop drug.
Celgene also has dozens of collaborations in oncology, immunology, and inflammation that it could potentially use to boost its long-term earning potential. Though these collaborations mean it has a lot of milestone money on the line to pay its partners if clinical trials are successful, it also ensures that Celgene is only putting its capital toward the most lucrative projects.
Lastly, its recently announced acquisition of Juno Therapeutics, along with its purchase of Receptos, which allowed it to add experimental multiple sclerosis drug ozanimod to its pipeline -- though the latter endured its own temporary setback in recent weeks -- are two ways it could diversify its portfolio away from the fast-growing Revlimid in the years to come.
Currently valued just over 9 times its 2019 EPS projections, Celgene looks to be a unique value in an otherwise pricey biotech industry.
Quietly gaining momentum
Maxx Chatsko (Core Laboratories): Oil and gas production and management services leader Core Laboratories has been quietly building on American energy production trends. Keyword: quietly. Revenue rose each and every quarter in 2017 while operating income followed in lockstep. While full-year 2017 revenue of $660 million is a far cry from the glory days of 2014, when sales eclipsed $1 billion, there are multiple positive indicators that would lead investors to believe that operational improvements will continue for the foreseeable future.
Management has guided for a seasonally slow first quarter -- as has been the case for five of the last seven years -- although revenue of up to $172 million could at least match that from the fourth quarter of 2017. That would mark 9% growth from the first quarter of 2016. Operating margin and EPS will be solid for the current period as well. But it could get better.
Core Laboratories noted that years of underinvestment in global oil and gas projects is beginning to catch up to the industry. Producers will be forced to shore up output at legacy assets as inventories decrease, a trend that is currently under way. In addition, many oil and gas producers have transitioned from focusing on production growth to instead turning the attention of their shareholders to return on invested capital and free cash flow (FCF). According to the company, the new focus tends to lean more heavily on technologically sophisticated production methods -- exactly the services offered by the reservoir analysis specialist.
Although the company only offered first quarter 2018 guidance, management hinted that trends currently under way are expected to continue progressing each quarter, and that the second-half of 2018 will receive a boost from international and offshore production recoveries. Considering that Core Laboratories is committed to delivering its rising FCF to shareholders through dividend increases and share buybacks, this is a stock Wall Street won't be able to overlook for much longer.
The bottom line
We can't guarantee that these three promising companies will outperform the broader market. But as Wall Street discounts the possibility of Boston Beer's turnaround, doubts Celgene's enviable portfolio of drugs and drug candidates, and underestimates the industry trends favoring Core Labs, we like their chances of doing just that. And we think investors would be wise to bet on their success before Wall Street catches on.