When many people search for stocks to buy, they often lean heavily on the recommendations provided by analysts on Wall Street. But astute investors know the biggest gains are reserved for those who are able to identify -- and take advantage of -- the calls it's gotten wrong.
To that end, we asked three Motley Fool investors to each find a stock that they believe Wall Street has mistakenly given up on. Here's why they like Chipotle Mexican Grill (NYSE:CMG), Applied Optoelectronics (NASDAQ:AAOI), and Regeneron Pharmaceuticals (NASDAQ:REGN).
Give this burrito maker another bite
Steve Symington (Chipotle Mexican Grill): When Chipotle investors got their first sniff of food safety issues in late 2015, many analyst couldn't sprint for the exits fast enough. Today, Chipotle shares trade nearly 60% below their all-time highs.
But with the help of new CEO Brian Niccol -- who most recently served as the former head of Yum! Brands' Taco Bell, a chain that knows a thing or two about overcoming major food scandals -- Chipotle is poised to deliver a meaningful turnaround that could mean enormous gains for patient investors.
That's not to say everyone on Wall Street has given up on the fast-casual burrito maker. Chipotle popped last month after two analysts upgraded the stock following its exciting hire. But even then, those upgrades offered tempered enthusiasm at best; Stifel increased its rating on Chipotle from sell to hold, increasing its per-share price target to $275 and saying they would prefer to remain on the sidelines as Chipotle implements traffic- and margin-driving initiatives. Credit Suisse also maintained its neutral rating, raising its own target to $290 and largely echoing Stifel's sentiment. Chipotle stock trades above both of those estimates at roughly $328 per share as of this writing.
Of course, I don't expect Chipotle to revisit is pre-scandal highs (at around $750 per share) anytime soon. Last quarter, its net income of $1.34 per share (adjusting for a one-time tax benefit) stood at only a third of what it earned in the same period three years ago. But it's already seeing the early benefits of its new queso and well-received menu price increases. Comps climbed a modest 0.9% year over year last quarter, and Chipotle believes the metric should increase in the low-single digit range for all of this year. Combined with the steady growth of its restaurant base (with between 130 and 150 new locations expected this year) and the potential for Niccol's influence to offer incremental margin and sales upside, I think Wall Street will regret remaining on the sidelines when Chipotle's accelerated progress becomes more evident in the coming quarters.
Don't call it a comeback
Anders Bylund (Applied Optoelectronics): The entire fiber-optic networking sector had a tough year in 2017, and only a handful of these suffering stocks have made much of a rebound this year. One of the lingering stragglers is optical networking component maker Applied Optoelectronics, whose shares have fallen 33% lower in 2018 and 60% over the last six months.
AOI's top-line growth started off fantastically strong in early 2017, driven by massive orders from the company's largest customer -- a little e-commerce outfit you may know as Amazon.com. But then Amazon tapped the brakes on its investments in data center infrastructure, waiting for a new generation of higher-speed hardware to enable more efficient optical equipment upgrades in the near future.
Amazon's order slowdown was the harbinger of similar lag from other customers, and the Chinese telecom market added some uncertainty due to regulatory headwinds in the Middle Kingdom. So that's where AOI's sales growth stalled, followed by lower profits of every kind and the tumbling share prices we explored 10 seconds ago.
But that brutal market reaction was a massive mistake.
These issues should be short-lived, more of a temporary rest than a long-term disaster. Amazon and others are coming back to the order window once they have figured out exactly how to design their next-level networks. The Chinese crackdown on internet businesses won't last forever, and things should return to normal in that market eventually. Based on management comments from AOI and other players in this sector, the second half of 2018 looks a lot like a return to the booming demand for high-speed networks that we saw in early 2017.
Meanwhile, Applied Optoelectronics shares are trading at the bargain-basement level of 6.7 times trailing earnings and 1.4 times book value. The company is still profitable and very much in the game when those next-generation component orders start pouring in. That's a solid buy-in opportunity in my book.
This biotech's getting back on track
Todd Campbell (Regeneron Pharmaceuticals): "Given up" might be a bit much, but in an era when hold ratings are akin to sell ratings, not many Wall Street analysts appear to be cheering on Regeneron Pharmaceuticals. About half of analysts who cover it rate it as a hold but, frankly, I think they ought to be more optimistic.
Regeneron's shares are in the doldrums because it's been slow going for Praluent, a highly anticipated cholesterol drug that launched to fanfare in 2015. Praluent, which is co-marketed by Sanofi, hasn't delivered on billion-dollar blockbuster projections, but its sales are picking up and new drug launches could kick-start interest in the company again.
In Q4, 2017, Praluent's revenue increased 54% year over year to $63 million, bringing full-year 2017 sales to $195 million, up 68% year over year. Sales could accelerate this year following positive trial results last quarter from a long-term cardiovascular study that shows Praluent reduces cardiovascular events and death.
Regeneron's Dupixent, a treatment for eczema that Regeneron and Sanofi launched last year, is another reason for excitement. Unlike Praluent, Dupixent's gotten off to a quick start. Its sales were $139 million in Q4 2017, which gives it a $560 million annualized run rate. That's a pretty good pace after only two quarters on the market and sales could climb even higher if the Food and Drug Administration expands its use to include asthma patients later this year.
Due in part to the growth of Praluent and Dupixent, Regeneron's beaten analyst earnings estimates in each of the past three quarters, and as a result, they've increased their outlook for 2018 to $18.40 from $16.85 90 days ago. Given the earnings trend, it wouldn't surprise me if a lot of those hold ratings become buy ratings soon.
The bottom line
We can't guarantee that these three stocks will go on to achieve market-beating returns. After all, Chipotle Mexican Grill, Applied Optoelectronics, and Regeneron Pharmaceuticals all face their own unique challenges in winning back the hearts of investors. But between Chipotle's ongoing turnaround, AOI's long-term promise, and Regeneron's compelling new drug pipeline, we think chances are high that they'll do exactly that. Patient shareholders willing to buy now stand to be handsomely rewarded when Wall Street realizes its pessimism was misplaced.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. Steve Symington has no position in any of the stocks mentioned. Todd Campbell owns shares of Amazon and Applied Optoelectronics. The Motley Fool owns shares of and recommends Amazon and Chipotle Mexican Grill. The Motley Fool has a disclosure policy.