Stocks that get on a roll tend to stay on a roll -- a fact that has sparked an entire stock-picking strategy known as "momentum investing." And while the exact mechanism underlying this phenomenon remains under debate, there's no doubt that momentum investing can in fact produce stellar returns on capital.
We thus asked three of our Motley Fool contributors which momentum stocks they think are worth buying right now. They picked Horizon Pharma (NASDAQ:HZNP), Baidu (NASDAQ:BIDU), and Okta (NASDAQ:OKTA). Here's why.
More growth to come
George Budwell (Horizon Pharma): A little over two years ago, I recommended Horizon Pharma's stock as a risky but attractive buy for growth-oriented investors. And even though this mid-cap pharma stock has gained nearly 50% in the intervening period, I still think it has a lot more room to run.
What's the reason for my optimism? First and foremost, Horizon recently reported stellar late-stage results for its thyroid eye disease treatment teprotumumab -- potentially giving the drugmaker two major growth products (Krystexxa and teprotumumab) capable of hauling in a combined $1.5 billion in annual sales at peak.
Secondly, I think it's fairly evident that the market has yet to reward Horizon for its successful pivot to the orphan drug space over the last three years. Most orphan drug stocks, after all, trade at no less than eight times annual sales. Horizon's shares, on the other hand, currently trade at less than half this figure. Now, Horizon does have a troubling past as a specialty pharma, but that chapter in the company's life cycle appears to be coming to a close with this latest clinical success.
Where could this top biopharma stock be headed in the next two years? Horizon's shares should continue to rise in response to teprotumumab's commercial launch (assuming approval) next year and the market's subsequent recognition of the company's metamorphosis into a top-notch orphan drugmaker. In fact, I wouldn't be surprised if Horizon's stock gains another 50% by 2022 based on just these two factors.
A strong bet in China's tech and content trends
Keith Noonan (Baidu): In addition to its core search and digital ad business and its burgeoning ventures in artificial intelligence, Baidu is also a big player in China's content space -- albeit a more indirect one than it was a year ago. The company spun off its iQiyi streaming multimedia unit last March and still retains a roughly 60% share in the business. Some recent divergence between the two stocks following their recent fourth-quarter results has made the parent company even more attractive.
iQiyi is posting mounting losses as it invests to build out its content offerings and underlying technology, and splash effects from its half-billion-dollar net loss last quarter helped drag Baidu's profit for the period down 22% year over year. However, while Baidu stock has sagged post earnings, impressive sales gains for iQiyi and and comments suggesting the service could hit 120 million paid subscribers this year have pushed the streaming stock to big gains.
Baidu's performance in the quarter was actually pretty solid, and for investors who like iQiyi's prospects in China's streaming video market, investing in the search giant is a worthwhile way to stake a position in the Middle Kingdom's tech and content markets. Baidu has a strong balance sheet and a cash position of roughly $21 billion net of debt, and while its earnings performance will likely be choppy in the near term, its strong positions in search, AI, and entertainment content and distribution have shares looking cheap trading at roughly 17.5 times this year's expected earnings.
A soaring cloud stock
Jeremy Bowman (Okta): Cloud computing stocks have surged in recent years as the industry has shown both enormous growth and fat profits for many of the biggest players, and one under-the-radar stock that may just be getting started in the industry is Okta, a cloud-based provider of security and "identity-for-the-enterprise" services. Okta handles things like password protection and two-factor authentication for big companies, and its tools are used for customer-facing components like loyalty programs.
Since its April 2017 IPO, the stock has surged, and it is now up nearly 300%. The company has made a habit of crushing its own guidance as revenue continues to grow at a brisk pace. Through the first three quarters of 2018, Okta's top line has jumped 58%, much better than the 33% to 35% it originally guided at the beginning of the year. The company has benefited from both new clients joining the platform and clients expanding their relationship, and now has nearly 1,000 clients generating $100,000 in annual recurring revenue on its platform.
The scalable nature of its security and identity services means that the company should grow along with its clients, especially as more companies move to the cloud. In its Investor Day presentation last October, Okta said it was targeting 30%+ revenue growth for each of the next five years with strong operating leverage. Just 30% annual revenue growth over five years would mean revenue nearly quadrupling in that time.
Okta isn't yet profitable, but it is rapidly moving toward the black as it turned cash flow positive for the first time in the third quarter. The company reports fourth-quarter earnings on March 7. A strong report could be the catalyst for another surge in the stock.