Summer is officially here. School is out, consumers are traveling, and in some parts of the world, things are getting back to normal.
We asked five of our top contributors to share a stock idea before they head out for summer vacation. Here's why they highlighted Ayr Wellness (AYRW.F -0.84%), Illumina (ILMN 2.22%), Intel (INTC -1.74%), Nano-X Imaging (NNOX -0.11%), and Fiserv (FI -0.30%) as top opportunities.
Image source: Getty Images.
This stock has growth in its DNA
Todd Campbell (Illumina): Genetics and genomics are reshaping how we diagnose, treat, and manage disease and arguably, no company has contributed more to advances in health enabled by DNA research than Illumina. Since launching its first DNA sequencing machine in 2007, Illumina has grown into the market share leading provider of systems used by laboratories to understand how genetic differences contribute to disease.
Today, over 17,000 Illumina instruments are being used for DNA discovery globally. Nonprofits are using them to gain greater insight into genetic variations within populations big and small, while for-profit drug developers are using them to develop new treatments for rare and common diseases, including cancer. DNA tests are helping patients and doctors make more informed decisions regarding treatment plans and increasingly, they're helping would-be parents with fertility decisions. In the future, simple liquid biopsy DNA tests designed to spot cancer in its earliest stages could become as standard as cholesterol screening, and regular DNA testing could be used to ensure cancer remains in remission.
This growing market opportunity is fueling significant growth at Illumina. In 2020, the company reported $3.2 billion in revenue and in 2021, management expects revenue to grow at least 25%. Importantly, the company is highly profitable because each test done on one of its systems requires high-margin disposable products such as reagents. In 2020, these disposables accounted for 71% of revenue and in the first quarter of 2021, Illumina's earnings per share grew 15% year over year to $1.89.
Since genetics and genomics is significantly disrupting healthcare and Illumina is positioned perfectly as a leading supplier to this fast-growing industry, I think picking up its shares now could be smart.
High risk, high reward
Brian Feroldi (Nano-X Imaging): X-rays have been around for more than 120 years, so you might be shocked to learn that two-thirds of the world's population still does not have access to medical imaging technology. Why? The reason is that traditional medical imaging systems are too expensive, too big, and too complex.
Nano-X Imaging wants to change that. The company has invented a new type of x-ray technology that holds promise to drop the cost of medical imaging by an order of magnitude. In fact, Nano-X believes its technology will bring down the cost of production so much that it will be able to give its systems away for free. Nano-X will then charge its customers a small fee each time they perform a scan. If it wins regulatory approval, Nano-X's technology holds promise to be extremely disruptive and bring medical imaging technology to the world.
The keyword in that last sentence is "if." Nano-X hasn't yet won FDA clearance for its commercial system -- although it did gain FDA clearance for a key part of its technology -- so there are no guarantees that this technology will ever see the light of day. We should know whether or not Nano-X will gain FDA clearance before the end of 2021, so investors won't have to wait long to know more. In fact, management believes it will start shipping units by the first quarter of 2021 and it will have 15,000 systems up and running by the end of 2024.
How big could the pie be if Nano-X's technology and business model prove to be a success? There's no way to know for sure, but I think 10-plus-bagger returns are entirely possible given that this company is currently valued at $1.6 billion.
Make no mistake: Nano-X is an extremely speculative company at this point. However, given the huge potential, I decided to make this innovative healthcare stock a tiny part of my portfolio. If you are after a high-risk, high-reward investment, Nano-X might appeal to you, too.
Don't count this chipmaker out
Tim Green (Intel): The past few years for chipmaker Intel have been plagued with chronic manufacturing issues and the rising fortunes of rival Advanced Micro Devices. Intel has struggled to bring its 10-nanometer manufacturing process to volume production, launching 14nm gaming CPUs as recently as this year. This has opened the door for AMD to steal market share thanks in part to the manufacturing prowess of third-party foundry Taiwan Semiconductor Manufacturing.
Intel is not giving up on manufacturing. In fact, the company is doubling down on what it views as a critical component of its business. Intel plans to pour $20 billion into new factories, fueling both its own product ambitions and a new foundry business. Making chips for other companies has become a lucrative business, propelling TSMC into the ranks of the world's largest chipmakers. Intel wants a piece of that action.
Intel's plans will take years to play out, and there's no guarantee that the strategy will pay off. But investors can buy Intel stock today at an attractive price and get the chance for a major resurgence down the road. Intel is valued at about $225 billion and produced $21.1 billion of free cash flow last year. That number will drop to just over $10 billion in 2021 as the company ramps up its investments, but that's still not a bad deal given Intel's potential to break into the third-party foundry business.
Intel probably isn't going to give you a 1,000% return. But a low price and solid long-term potential make it a tech stock worth buying in July.
A fintech set to bounce back
Adam Levy (Fiserv): As retail sales pick back up and consumers move away from using cash, opting for credit and debit cards instead, Fiserv stands to gain. Both its merchant acceptance and payment processing segments benefit from more card payments in stores and online, and Fiserv holds significant scale in both businesses.
What's more, its small business payment processing solution, Clover, is growing rapidly despite the headwinds of 2020. Clover, similar to Square's seller solutions, is bigger and growing faster than Square. Gross payment volume (GPV) grew 36% in the first quarter to about $35 billion versus 29% growth and $33 billion in GPV at Square.
Meanwhile, Fiserv's core processing business in its fintech segment should remain a stable source of revenue, as switching costs are very high for the banks it serves. The biggest risk to that segment is bank mergers. Fiserv's customers tend to be smaller banks that are more likely acquisition targets.
Overall, the expected revenue growth in its most scalable businesses combined with realized synergies from the First Data acquisition should lead to very strong operating margin expansion and earnings growth. Management is calling for a more than 500 basis point improvement in operating margin by 2023. While operating income remains temporarily depressed and uncertainty about inflation (which has minimal impact on Fiserv's business anyway) keeps the stock price down, now is a great time to buy shares of Fiserv.
A cannabis bargain
Keith Speights (Ayr Wellness): Generally speaking, marijuana stocks are pretty expensive. However, I think Ayr Wellness is practically a bargain compared to most of its peers. Its shares trade at less than five times sales -- lower than the price-to-sales multiple of all but one major U.S. multi-state operator and much better than all of the top Canadian cannabis producers.
Of course, a low valuation doesn't necessarily make a stock a great pick. But Ayr isn't just cheap; it also offers tremendous growth prospects. The company's revenue soared 74% year over year in the first quarter of 2021 to $58.4 million. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) skyrocketed 136% to $18.4 million.
I look for Ayr's growth to accelerate thanks in large part to its wheeling and dealing. The company completed its acquisition of Liberty Health Sciences in February, giving it the fourth-largest retail network in Florida's booming medical cannabis market. Ayr closed on acquisitions in Arizona and Ohio in March.
The multi-state operator doesn't have to rely solely on acquisitions to fuel growth, though. The cannabis markets in the states where it currently operates continue to expand. Ayr is capitalizing on this growth by opening new dispensaries.
Efforts are under way to advance major cannabis reform legislation through the U.S. Congress. This could pave the way for Ayr to list its shares on a U.S. stock exchange in the not-too-distant future. If substantial progress is made on this front, I think Ayr's share price could realistically double by the end of 2021.
