Some cheap stocks deserve to be cheap. When your business is bad, your stock price should be down. But every once in awhile, you can find high-growth stocks in the cheap seats: amazing companies with wonderful business models that are undervalued by the market. When you find a company that excites growth investors and makes value investors happy, that's a stock you want to investigate.
Here are two companies that are surprisingly cheap right now. Farfetch (FTCH +0.00%), the high fashion e-tailer, is down 56% from its initial public offering (IPO) despite its amazing growth rates. And one of the high-flying growth stocks of the last decade, Jazz Pharmaceuticals (JAZZ +0.99%), is now officially a value stock that is cheap across every metric.
Is it time to buy?
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1. Farfetch: Rising off the bottom
When I first wrote about Farfetch last September, the stock was trading at $8.89 a share. Since then, it has rallied to $12.29. But the company remains way underwater from its IPO price of $27. And Farfetch is still an incredibly cheap company, with a price-to-sales ratio of 4.48, a price-to-book ratio of 2.94, and a price-to-earnings-growth ratio of 0.27.
Farfetch is the top high-fashion website in the world. Almost 2 million customers shop on the site, where they can find over 3,000 upscale brands. The company had an outstanding earnings report in November, with revenue shooting up 90% to $255 million for the quarter. And the stock skyrocketed in response.
Yet market sentiment still seems negative with its shares priced so cheaply. When Amazon.com (AMZN +2.33%) announced it was going to copy what Farfetch is doing, the news sent shares down again. But why? Amazon's copycat efforts will fail, like its attempt to copy what eBay was doing, or what Shopify was doing. Even mighty Amazon can't compete with the networking effect. High fashion shoppers go to Farfetch because those thousands of brands are there, and all those brands are there because of all those shoppers. Amazon's attempt to compete with its 12 high fashion brands is too little, too late.
2. Jazz Pharmaceuticals: This sleep-disorder specialist is on sale
Jazz Pharmaceuticals was one of the top healthcare stocks over the last decade, with shares up an amazing 1,699%. Yet all of that outperformance was crammed into the first half of the decade. Over the last five years, the stock has actually been negative, dropping in value 15%, severely underperforming the S&P 500.
It might be time for another ramp-up. Jazz is super-cheap right now, with a price-to-book ratio of 2.76, a price-to-sales ratio of 4.10, a forward P/E of 8.66, and a PEG of 0.83. The company's financials are very nice, with a profit margin of almost 30% and a double-digit growth rate. Last quarter, it grew revenue almost 15% year over year. And that growth should escalate as new drugs hit the market.
In March 2019, the Food and Drug Administration approved the company's new drug application for Sunosi, to treat excessive daytime sleepiness (EDS) in patients with narcolepsy or obstructive sleep apnea (OSA). There are 165,000 patients with narcolepsy in the U.S., and 12 million with sleep apnea. Management also believes the drug can be expanded into other indications for EDS, including major depressive disorder. The company projects sales to reach $500 million annually in five years.
Jazz has a blockbuster drug in Xyrem on the market already. It is the standard of care for cataplexy and EDS in narcolepsy, with 2019 sales projected to be over $2 billion. Jazz has a follow-up drug, JZP-258, for the same indication, but with 92% less sodium than Xyrem. JZP-258 had positive phase 3 data, and the company expects to have this drug approved by the FDA later this year.
Which cheap stock is the better buy?
Of the two stocks, Jazz is the safer pick, since this drug company is highly profitable and has a dominant position in sleep-disorder treatment. The one risk with Jazz is that its flagship drug, Xyrem, is coming off patent in three years. So the question with Jazz is whether its up-and-coming drugs can make up the difference when the company falls off the patent cliff.
While Farfetch is not profitable, the company has outstanding revenue growth and a dominant position in the high fashion industry. The networking effect makes it almost impossible for any competitors, even Amazon, to dislodge it. While both stocks are super-cheap and should be strong investments, Farfetch has a higher upside.
