Choosing between a stock that has a lot of upside and one that offers stability can be a difficult decision for investors, and it could make a significant impact on overall returns. Cara Therapeutics (CARA -2.80%) and Fresenius Medical Care AG & Co. (FMS -0.69%) are two companies that are in very different stages in their businesses and come with very different risks.
They've achieved similar returns in 2019, but there's no guarantee that will be the case in future years. Let's take a closer look at the two companies and see which is the better investment option today.
Is Cara Therapeutics too dependent on the success of Korsuva?
Heading into December, Cara Therapeutics was having a terrific year. At that point, the stock was up around 80% since January, and things were looking good. With its drug Korsuva making progress in phase 3 trials and Oral Korsuva in phase 2 and showing potential as well, the stock was on track to continue climbing even higher.
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However, on Dec. 3, Cara Therapeutics stock went over a cliff when the company released the results from a phase 2 study involving Oral Korsuva. In short, the drug didn't meet all expectations; it missed two endpoints, and although they were secondary, investors panicked. Oral Korsuva will still proceed into phase 3, but investors will now have many more concerns surrounding the drug's success.
The risk for investors is that with just $20.9 million in sales over the past four quarters and net losses totaling $98.4 million during that time, the success of its clinical trials will largely dictate which direction the stock goes in the future. That's where investors are taking a big gamble investing in Cara Therapeutics, because a less-than-ideal result from its clinical studies could wreak havoc on the stock. Effectively, investors are betting on whether the trials will go well.
Fresenius offers more predictability
Unlike Cara Therapeutics, Fresenius has strong financials, and its success isn't tied to a clinical trial of one or two drugs. The company's products and services help people with renal diseases, and in each of the past four quarters, its profits have been at least 250 million euros, while revenue hasn't fallen below 4.1 billion euros.
The company offers patients the ability to conduct dialysis at home rather than having to visit a hospital. In July, U.S. President Donald Trump signed an executive order that would incentivize home dialysis in an effort to change the way that kidney diseases are treated and to lessen the burden on hospitals. The company issued a release stating that "We share the U.S. Administration's commitment to expanding access to home dialysis, transplantation and new models of value-based care for chronic kidney disease, and we see it as an endorsement of our initiatives."
While initiatives could change if there's a change in government, healthcare stocks are always going to face risks when it comes to new regulations. But the initiative could help hospitals bring down their spending on dialysis, making it unlikely that regulators will want to change the rules.
Safety makes Fresenius the better buy today
Both Fresenius' and Cara Therapeutics' share prices have achieved 14% returns in 2019, although their paths to that figure have been different. Those returns are less than the S&P 500's 29% increase this past year and also lag the Health Care Select Sector SPDR Fund, which rose 21%. But if not for a recent sell-off, Cara Therapeutics would have wildly outperformed Fresenius in 2019. However, that's also an example of why the stock is too risky a buy today. While it could achieve better returns, especially if trials of Oral Korsuva are positive, there's no way for investors to know if that will be the case.
That's where investing in a more established business like Fresenius, which already has significant sales and profits, is the much safer approach. It might not have the potential to produce the same returns as Cara Therapeutics, but it won't put your portfolio in harm's way either. At a modest 10 times earnings, Fresenius is a good choice for value investors. Cara Therapeutics doesn't have an earnings multiple because it remains unprofitable.
With a more established business and strong fundamentals today, Fresenius is the better buy. Cara Therapeutics could become the better option down the road, but for now, there's too much uncertainty surrounding this healthcare stock.
