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3 Winning Stocks Down 33% (or More) to Buy Hand Over Fist

By Sean Williams – Sep 19, 2021 at 6:06AM

Key Points

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When great companies go on sale, it's time for investors to pounce.

For nearly 18 months, investors have enjoyed a historic bounce-back rally in the stock market. After losing 34% in roughly a month during the first quarter of 2020, the benchmark S&P 500 has since doubled in value.

However, not all winning stocks have been taken along for the ride. The following trio of stocks are all down at least 33%, if not more, from their 52-week highs, but can be confidently bought hand over fist by investors.

A lit LED sign in front of a store that reads, Super Sale.

Image source: Getty Images.

Redfin: Down 51% from its 52-week high

The first winning stock that's been beaten down of late is technology-driven real estate company Redfin (RDFN -9.58%). Since mid-February, shares of the company have been essentially halved.

Why the recent rout? Interest rates hold the answer. Mortgage rates often closely correlate with the 10-year Treasury yield. With the Federal Reserve talking about the possibility of taking its foot off the gas with regard to its bond-buying program and raising rates in 2022 or 2023, the expectation is we could see mortgage rates rise. The clear and obvious concern is higher mortgage rates could cool what's been a red-hot housing market.

But my take is that giving rising mortgage rates too much weight would understate the transformation we're witnessing in how real estate is sold. Redfin is changing the real estate landscape in two key ways.

First, it's putting more money back into the pockets of buyers and sellers. Most traditional real estate companies charge a commission/listing fee that ranges between 2.5% and 3%. Meanwhile, Redfin significantly undercuts its peers with a 1% or 1.5% fee, which is dependent on how much previous business was conducted with the company. According to Redfin, the national median home-sale price in August was $380,271. Based on savings of up to two percentage points, the company's sellers could be hanging on to a median of $7,600.

Second, we're seeing personalization in the real estate space like never before. During the pandemic, Redfin supported buyers and sellers by offering virtual and 3D tours. There's also the Concierge service, which charges a fee to aid sellers with staging or upgrades to maximize the selling price of their home. Even the RedfinNow service is making a difference. With this service, which is offered in select cities, Redfin buys homes for cash, thereby removing the hassle and haggling associated with selling a house.

Since the end of 2015, Redfin's share of U.S. existing home sales has nearly tripled from 0.44% to 1.18%. This is a pretty good indication that this winner can deliver for investors for a long time to come.

Two college students sharing a laptop.

Image source: Getty Images.

Baidu: Down 55% from its 52-week high

Another winning stock that's down on its luck is China's leading internet search provider Baidu (BIDU 0.35%). Shares of the company have fallen 55% from their 52-week high, which presents the perfect opportunity for investors to purchase Baidu hand over fist.

How does such a prominent growth stock lose 55% of its value in seven months? The answer lies with tightening regulations on tech stocks and select industries in China. As an example, China hit the country's leading e-commerce company, Alibaba, with a record antitrust fine of $2.8 billion in April. Any innovative Chinese tech company is being viewed as a potential target by regulators, which has made investors skeptical of putting too high a valuation multiple on Baidu.

On the other hand, there's been nothing to indicate that Baidu will find itself in the crosshairs of Chinese regulators. While politics will always be a bigger concern with China-based stocks relative to owning stakes in U.S.-based companies, the long-term growth prospects for Baidu more than outweigh these near-term concerns.

In China, Baidu is the undisputed market share kingpin for internet search. Data from GlobalStats shows it's held between 67% and 80% of all internet search share in the country over the trailing 12 months. In short, it means Baidu is the clear go-to for advertisers looking to reach consumers in the No. 2 economy in the world. If China maintains its rapid growth rate, marketing revenue for Baidu can sustainably grow by a double-digit percentage.

Perhaps even more exciting than the company's core operating segment are its investments into cloud services and artificial intelligence (AI). AI is a particularly fast-growing opportunity, especially given the role it could play in next-generation automobiles. Though this non-marketing revenue only accounted for 16% of total sales in the June-ended quarter, it grew by 80% from the prior-year period.  Even accounting for pandemic-related spending slowdowns in China, cloud and AI revenue are growing much faster than any other segments for Baidu.

Rarely do investors get a chance to buy a winning stock with double-digit sales growth potential and a forward price-to-earnings ratio of just 14. But that's exactly what Baidu offers.

A multi-pipette device filling a row of test tubes with liquid under ultraviolet light.

Image source: Getty Images.

Vertex Pharmaceuticals: Down 33% from its 52-week high

Lastly, there's specialty biotech stock Vertex Pharmaceuticals (VRTX -1.82%), which has lost a third of its value since hitting its 52-week high. To give you an idea of what sort of winner Vertex is, its shares up are close to 3,300% over the trailing 30 years.

If you're wondering why the company has been pummeled of late, look no further than two failed clinical studies for alpha-1 antitrypsin deficiency (AATD). Last October, VX-814 was discontinued in clinical studies after elevated liver enzymes were seen in some patients. Then, in June 2021, VX-864 was discontinued, with the company noting it was unlikely to demonstrate a "substantial clinical benefit" in a larger-scale study.

However, the failure of two clinical studies doesn't negate Vertex's incredible success in developing multiple generations of treatments for cystic fibrosis (CF). CF is a genetic disease characterized by thick mucus production that can obstruct the lungs and pancreas. In total, Vertex has developed four generations of gene-specific CF treatments, the latest of which (Trikafta) has reached a $5 billion annual run-rate in less than two years on pharmacy shelves. Vertex's CF cash flow is well-protected from competition.

Of course, Vertex isn't satisfied being a leader in only one indication. It has more than a half-dozen compounds in development, some of which have been out-licensed. In particular, VX-147 for APOL1-mediated kidney disease and VX-880 for type 1 diabetes are generating the most buzz for the company, outside of its CF franchise. 

If you need one more reason to feel confident in buying Vertex, take into account its robust cash position and insane cash flow from its CF franchise. This is a company that ended June with $6.7 billion in cash and cash equivalents, and that has generated over $2.1 billion in operating cash flow over the trailing 12 months. This capital could allow Vertex to go shopping, or it might even make Vertex a takeover target at some point in the future. No matter the scenario, it's a winning stock that can be bought hand over fist.

Sean Williams owns shares of Vertex Pharmaceuticals. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Baidu, Redfin, and Vertex Pharmaceuticals. The Motley Fool recommends the following options: short September 2021 $65 calls on Redfin. The Motley Fool has a disclosure policy.

Stocks Mentioned

Vertex Pharmaceuticals Stock Quote
Vertex Pharmaceuticals
$311.81 (-1.82%) $-5.79
Baidu Stock Quote
$117.33 (0.35%) $0.41
Redfin Stock Quote
$5.00 (-9.58%) $0.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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