It's been a wild year for the investment community. They've navigated their way through the quickest downturn of at least 30% in the history of the benchmark S&P 500 and basked in the most robust bounce-back rally of all time. Patience has certainly paid off handsomely for long-term investors.
But just because the widely followed S&P 500 is within a stone's throw of its all-time high doesn't mean there aren't bargains. In particular, three top stocks stand out for their mix of growth and value and should be able to make investors a lot richer in April and well beyond.
It's no secret that growth stocks have been clobbered over the past six weeks by a combination of sector rotation and concerns over higher Treasury bond yields. But this recent panic is creating ample opportunity for investors who have a long-term horizon. That's why high-growth cybersecurity stock CrowdStrike Holdings (CRWD -1.05%) is a company to buy now.
The macro thesis for cybersecurity is pretty simple. We were already seeing businesses steadily shift their presence online and into the cloud before the coronavirus pandemic struck. The pandemic has simply accelerated this shift and placed the onus of enterprise data protection increasingly on third-party providers like CrowdStrike.
The company-specific thesis is that CrowdStrike's cloud-based Falcon security platform is a beast. It was built in the cloud and is capable of overseeing more than 5 trillion events each week. By relying on artificial intelligence, Falcon is getting more efficient at identifying potential threats to enterprise data over time. This is why, in many instances, CrowdStrike's cloud-native security solutions respond faster and are a more cost-effective long-term solution than on-premises security options.
The uptake of CrowdStrike's security solutions has been nothing short of incredible. Dollar-based retention rates -- a measure of increased year-over-year spending for existing clients -- have varied between 123% and 147% for the past 12 quarters, implying year-over-year sales growth of at least 23% to 47% for retained customers. What's more, 63% of its customers have at least four cloud module subscriptions, which is up from 9% less than four years ago. Many of the company's clients are growing quickly, and Falcon was built to seamlessly scale right along with them.
But the biggest jaw-dropper of them all might be that CrowdStrike's subscription gross margin already hit its long-term target of 75% to 80% in the early innings of its growth phase. Subscription-based cybersecurity models provide highly transparent, high-margin cash flow, especially with a customer retention rate that's been pegged at 98% for more than two years.
CrowdStrike has the potential to grow its top line by 30%-plus annually throughout the decade. That makes its latest pullback a no-brainer buying opportunity.
For better or worse, Intercept's future relies on obeticholic acid (OCA), a drug currently being studied as a treatment for nonalcoholic steatohepatitis (NASH). NASH is a liver disease that affects up to 5% of the U.S. adult population. It can lead to liver fibrosis, liver cancer, and even death. Currently, there's no treatment for NASH, but it's valued as a $35 billion opportunity for drug developers.
The good news for Intercept is that OCA met one of its two co-primary endpoints in late-stage trials. In the February 2019-released data, OCA led to a statistically significant improvement in fibrosis of at least one stage without a worsening of NASH. Since most other NASH drug developers have had setbacks, it looked as if Intercept was on pole position to crack the code to this hard-to-treat disease.
The bad news is the company received a Complete Response Letter from the U.S. Food and Drug Administration, which is demanding additional safety data from ongoing studies. The highest dose of OCA in the Regenerate phase 3 trial led to pruritus (itching) in 51% of patients, with a grand total of 9% of patients dropping out of the study. That compared to about 1% of placebo patients withdrawing.
The buy thesis is that Intercept will satisfy additional safety requests, and the benefits of OCA will outweigh the risks of relatively mild-to-moderate adverse events. Even if OCA is administered to a smaller subset of the sickest NASH patients, Intercept could generate well in excess of $1 billion in annual sales.
The icing on the cake is that OCA is approved to treat primary biliary cholangitis (PBC) under the brand-name Ocaliva. This year, Ocaliva should bring in between $325 million and $355 million treating PBC patients. With Intercept's market cap at $764 million, as of this past weekend, Wall Street is placing an extremely low multiple of around two times sales on the company. Essentially, investors are getting OCA as a potential NASH treatment for free, with Ocaliva for PBC providing a downside buffer.
The risk/reward scenario absolutely favors optimists here.
Kirkland Lake Gold
If deep-discount value is more your thing, you're going to find an abundance of single-digit and low double-digit price-to-earnings ratios in an unlikely industry. Following years of cost-cutting and a healthy rally in physical gold, a number of gold stocks now perfectly fit the mold as value stocks. Perhaps none is more attractive than Kirkland Lake Gold (KL).
Before diving into the Kirkland Lake buy thesis, it's important to reflect on the reasons physical gold should be buoyed or head higher in the coming years. In no particular order:
- Global bond yields may have rallied in recent weeks, but many still offer yields that trail the inflation rate.
- The Federal Reserve has reiterated its intention to hold its federal funds target rate at or near historic lows through 2023.
- The Fed is continuing its monthly bond-buying program.
- The Biden administration recently passed $1.9 trillion in stimulus and might be looking at $3 trillion or more in additional spending.
The point is, the money supply is increasing, which should pressure the U.S. dollar. Since the dollar and physical gold move opposite of each other, dovish monetary policy bodes well for gold.
As for Kirkland Lake, it operates three of the most efficient gold mines in the world. The company's all-in sustaining costs (AISC) for its three producing assets came in at $800 per gold ounce in 2020. Even after a pullback in physical gold, Kirkland Lake is netting well over $900 per ounce in margin.
Furthermore, Kirkland Lake has what's arguably the best balance sheet in the entire mining industry. It ended the year with $847.6 million in cash and no debt (yes, no debt), and generated $733.1 million in free cash flow after acquiring the Detour Lake mine. Having such a robust balance sheet allowed the company to triple its quarterly dividend and repurchase 20 million shares of its stock.
Value investors can scoop up shares of Kirkland Lake Gold right now for just nine times earnings per share in 2021 and only six times cash flow. In my experience covering the gold industry, a multiple of 10 times cash flow is reflective of fair value.