Alibaba is a market darling technology company, but notoriety doesn't make a company a great investment. Below are two lesser-known stocks that have the potential to beat its performance and one boring industrial company that has already achieved that outperformance -- with more of the same likely in the future. Read on to find out why our Foolish investors like Fitbit, Inc. (NYSE:FIT), Amarin Corporation (NASDAQ:AMRN), and A.O. Smith Corporation (NYSE:AOS).
Betting on affordable smartwatches
Tim Green (Fitbit): Let's face it: Fitbit isn't much of a growth company anymore. After a period of breakneck expansion immediately following its IPO in 2015, the company ran into some serious issues. Demand for its fitness trackers started to slump just as the company's costs were exploding. The result has been five consecutive quarters of declining revenue and some shockingly large losses.
Fitbit doesn't expect 2018 to be any better, with guidance calling for another revenue decline. But the company will attempt to plant the seeds of a comeback this year. Fitbit's expensive Ionic smartwatch, which launched last year, failed to live up to expectations. But the Versa, a $200 smartwatch set to launch in April, could be just what the company needs to turn itself around.
Fitbit has over 25 million active users, but it hasn't been able to effectively compel those users to upgrade to new products. The Versa, priced just $50 above Fitbit's flagship Charge 2 fitness tracker, may be affordable enough to trigger a meaningful upgrade cycle. Versa lacks some features, like built-in GPS, but it still offers substantially more functionality than a fitness tracker.
Fitbit stock has lost nearly 90% of its value since peaking back in 2015. Given how much it's been beaten down, the stock could rocket higher if Versa is a home run.
The start of something special
George Budwell (Amarin): Amarin, a small-cap Irish biopharma, has slowly but steadily proved the doubters wrong about its prescription fish oil pill Vascepa. In 2018, for example, Vascepa is on track to generate a healthy $230 million in sales, which is solid evidence that the drug is indeed a success story -- at least so far.
When Vascepa was first approved for patients with extremely high triglyceride levels, however, critics suggested that the drug would fail right out of the gate because over-the-counter omega 3 supplements were readily available at a fraction of the price. And later on, the drug's critics were further emboldened when a handful of studies failed to find a positive association between omega 3 supplementation and a reduced risk of serious cardiovascular events like heart attack and stroke.
Fast-forwarding to today, the raging battle between the bulls and bears over Vascepa's utility is finally nearing its long-awaited conclusion. Vascepa's ongoing cardiovascular outcomes trial for patients with elevated triglyercides levels despite being on statin therapy is expected to produce top-line data by the end of the third quarter of this year.
If successful, Vascepa's target market would grow exponentially overnight, and almost certainly catapult the drug into blockbuster territory. Thus, a positive outcome would likely cause Amarin's stock to double or even triple in value before the end of 2018.
The catch, though, is that recent review studies have cast serious doubt on the clinical benefit of omega 3 supplementation in patients at risk of cardiovascular disease. That's not to say that Vascepa won't reverse this trend, but the odds are against it based on all available evidence to date.
So while this speculative biotech could perhaps produce jaw-dropping gains on par with the e-commerce giant Alibaba, investors should also keep the stock's hefty risk profile firmly in mind ahead of this all-important clinical event.
This bore of a company is outperforming
Reuben Gregg Brewer (A.O. Smith): A.O. Smith makes water heaters, and is starting to branch off into water and air purification. It's had a great run, with the top line growing at an average of 10.5% a year since 2010 and earnings expanding an impressive 26% a year. Selling water heaters is a boring, slow-growth business in developed markets (roughly 65% of revenue), but in developing markets (35%) like China and India, A.O. Smith's products are in high demand. Sales in China, for example, have grown 21% a year, annualized, over the past decade.
A.O. Smith is expecting developing markets and its push into water and air purification to help keep the top line growing at around 8% a year, slightly below levels seen in the recent past but still a strong number. Investors have rewarded the company's past performance by pushing its stock up by over 1,000% over the last decade. And if history is any guide, investors will continue to reward A.O. Smith for steadily growing its business.
Here's the interesting thing: This water heater maker's stock has easily outdistanced Alibaba's stock since the tech company came public in 2014. If A.O. Smith can keep firing on all cylinders, there's no reason why that outperformance wouldn't continue.
Another statistic that I found interesting is that A.O. Smith's return on invested capital is fairly stable and right in line with Alibaba's return today. That suggests that relatively unknown A.O. Smith is investing its shareholders' money just as well as Alibaba, a media darling technology company. Only Alibaba's return on invested capital has fluctuated wildly over its short history, a trend that I would expect to continue. Add it all up, and I'd stick with the steady and boring water heater maker here.