2017 was a great year for investors, with the S&P 500 gaining 19.4% and the Dow Jones Industrial Average up 25%. However, investors in First Solar, Inc. (NASDAQ:FSLR), KB Home (NYSE:KBH), and Sangamo Therapeutics Inc. (NASDAQ:SGMO) did even better. First Solar and KB Home shares were up 110% and 102%, respectively, while Sangamo Therapeutics investors captured an incredible 438% in gains last year.
But what about now? Should investors put them at the top of their "buy" lists today? We asked three Motley Fool investors with the knowledge to break down the case for all three, and here are their insights.
A solar leader for the long term
Jason Hall (First Solar): Shares of solar panel maker First Solar did more than double in 2017, finishing the year up 110%. Even with this incredible run, I think investors with a long-term outlook -- and the willingness to hold for multiple years -- should do very well to buy First Solar now.
What makes First Solar worth buying at a price that's so close to its recent peak? In short, as solar becomes a bigger and bigger part of the global energy mix, First Solar is one of the best companies in the industry to profit. It has been a technology leader for years, with its thin-film panels giving it an edge in large-scale solar projects, and has the resources to remain a leader.
First Solar has almost $3 billion in cash and less than $400 million in debt, while nearly all of its panel-making competitors have far more debt than cash:
In a highly cyclical industry like solar, it's hard to overstate the importance of a strong balance sheet. But it's more than just the cash: That's a reflection of how effectively First Solar management has allocated capital.
There's no promise that First Solar's stock will go up in 2018, much less double like 2017. But looking years into the future, investing in the strongest, best-run solar panel maker out there should generate positive returns for shareholders -- even at current prices.
Pass on the "other" gene-editing pioneer (for now)
Maxx Chatsko (Sangamo Therapeutics): While the use of CRISPR systems as a gene-editing tool is taking the investing world by storm, investors have also noticed that Sangamo Therapeutics is positioning itself within the same discussion. That's because the biopharma aims to use zinc finger nucleases (ZFN) instead of CRISPR to alter the genetic sequences of patients.
Although the technology has been around for quite some time, it's been granted new life thanks to several partnering agreements in the gene-editing space. In fact, Sangamo Therapeutics owns the distinction of being the first company to bring a gene-editing trial into the clinic. That, and a partnership with Pfizer, had a lot to do with the stock's 438% rise in 2017. This year, the company went even further and linked up with Gilead Sciences. Does that make the stock a buy?
Well, there's much left to prove for all gene-editing technologies when it comes to therapeutic applications. While investors will get the first look at clinical data for the Pfizer-partnered early-stage drug candidate near the middle of 2018, the initial data readout won't provide much in the way of certainty about the company's future. That will take a few more years and late-stage clinical trials with much larger patient populations (the current phase 1/2 trial dosed three people by the end of February).
Therefore, even though Sangamo Therapeutics is exciting investors and Wall Street with an impressive string of partnerships and a revived pipeline, there's still a high degree of uncertainty surrounding the company. Given the incredible surge since the beginning of 2017 and the current $1.9 billion market cap, I think investors would be better off passing on this investment right now.
Home, home on the range
Chuck Saletta (KB Home): Homebuilder KB Home almost exactly doubled in price in 2017, an artifact of a housing market that had been woefully undersupplied with new entry-level homes. Still, despite that meteoric rise last year, the company currently trades at around 16 times last year's earnings and less than 10 times expected 2018 earnings, making it appear on the surface as a decent value even today.
Still, when it comes to investing, it pays to remember that the fair value of a company is based on the entirety of its expected future earnings discounted to today's value, not just next year's earnings. As awesome and impressive as KB Home's valuation currently looks given its recent past and immediate future prospects, the longer term is not quite as certain.
Rising interest rates create strong headwinds for homebuilders like KB Home. Very few people pay cash for their homes, and rising rates make it more expensive to borrow money to buy. With the Federal Reserve actively hiking short-term rates, it's likely that rates for mortgages will follow suit. That means people will be able to afford to borrow less money, leading to smaller houses, fewer upgrades, or less homes sold overall.
That translates to lower revenue and profits for homebuilders. In other words, the market is rationally pricing a downturn as part of the regular cycle that homebuilders face. KB Home will likely survive the next downturn, but that cyclical nature in the industry also means its shares may not be the bargain they appear by looking at backwards measures. Investors considering buying now should be patient as those headwinds from rising rates may take a while to clear.