If Wall Street has demonstrated anything, it's the value of patience. If you buy high-quality companies and hang onto them for long periods of time, your chances of growing your initial investment by leaps and bounds goes up significantly.
During the coronavirus crash in February/March 2020, I practically threw the kitchen sink of available cash I had on hand at more than a dozen new and already-held stocks. Many of these buys have worked out beautifully, and I have no intention of selling. But with minimal buying activity during this 18-month mega-bounce-back rally, I'm now sitting on more cash than at any point in my more than two decades as an investor.
Below are five stocks I currently don't own that I'm watching very closely and likely looking to buy on any significant weakness.
As a general rule, I usually don't buy clinical-stage biotech stocks. The last one I owned a stake in was Geron, and that was over three years ago. However, clinical-stage biotech company Novavax (NVAX 0.50%) has my full attention.
The fact of the matter is that Novavax is unlikely to be a clinical-stage drug developer for much longer. It's one of a handful of companies expected to play a key role in the fight against coronavirus disease 2019 (COVID-19). The company's experimental COVID-19 vaccine (NVX-CoV2373) proved highly effective in two large-scale studies.
A study in the U.K. this past March demonstrated a vaccine efficacy (VE) of 89.7%. Three months later, a large-scale U.S./Mexico trial yielded a VE of 90.4%. While initial efficacy isn't the end-all with COVID-19 vaccines, Novavax could have a real shot to assert itself as the third major player on the vaccine front, next to Pfizer/BioNTech and Moderna.
What's more, Novavax's vaccine development platform should allow it to quickly tackle new variants and develop potential combination treatments in the future. For instance, Novavax has an opportunity to beat its rivals to market with a combination COVID-19/influenza vaccine.
While I believe Moderna's $174 billion valuation is a bit much to pay for a company with a single therapy, it makes little sense that Novavax is only worth $17.7 billion when its vaccine could deliver $5 billion or more in sustainable annual sales.
Marijuana stocks have been nothing short of a buzzkill for the past seven months. There was hope that the Biden administration would legalize cannabis at the federal level, but more pressing concerns (e.g., COVID-19) have taken precedence. Though this has left pot stock investors disappointed, it's brought down valuations significantly. That's why I'm eyeing Cresco Labs (CRLBF -1.80%).
The interesting thing about Cresco is that it has two highly profitable plans of attack. First, like most U.S. multistate operators (MSOs), it's expanding its retail operations. Following the closing of its Cultivate acquisition in Massachusetts, Cresco now has 37 operating dispensaries, 47 total retail licenses (i.e., it can open 10 more retail locations), and a presence in 10 states.
Notably, many of the states Cresco operates in are limited-license issuers. This means only a fixed number of retail and/or growing licenses will be awarded. By purposely reining in competition, Cresco is being afforded an opportunity to build up its brands and gather a loyal base of customers.
But the defining factor here, at least to me, is Cresco's industry-leading wholesale revenue. Even though wholesale is a lower-margin segment, relative to retail, Cresco more than makes up for weaker margins with insane volume potential. That's because it holds one of only a handful of cannabis distribution licenses in California, the biggest pot market in the world by annual sales. With the ability to place pot products into more than 575 dispensaries statewide, Cresco is a budding cash cow.
Annaly Capital Management
But it's not just about unbridled growth. If I can find stocks that offer inflation-crushing income with modest share price upside, I'll jump at that opportunity. That's where ultra-high-yield dividend stock Annaly Capital Management (NLY -0.27%) comes into play. Annaly is currently paying out a 10.2% yield.
Annaly Capital is a mortgage real estate investment trust (REIT). To demystify this long descriptor, this just means it borrows money at lower short-term lending rates and uses this capital to buy mortgage-backed securities (MBSs) that have higher long-term yields. If you subtract this average higher long-term yield from the lower borrowing rate, you arrive at Annaly's net interest margin.
What has me intrigued is the strong likelihood of a steepening yield curve and widening net interest margin in the coming years. Pretty much every economic recovery I've examined involves long-term yields rising and short-term yields flattening or declining. If this is accompanied by slow and telegraphed monetary policy changes from the nation's central bank, profits for mortgage REITs tend to soar.
Furthermore, Annaly Capital almost exclusively purchases agency MBSs. Agency securities are those backed by the federal government in the event of a default. This added protection allows the company to utilize leverage to increase its income potential.
With Annaly averaging an annual yield of about 10% over the past two decades, it looks like a good bet to put inflation in its place.
Moving back to growth stocks, I'm also very closely eyeing advertising technology company PubMatic (PUBM -1.52%).
Long gone are the days when humans negotiated over ad pricing and placement. The advent of the internet, and now machine-learning algorithms, allows platforms like PubMatic's to help buy, sell, and optimize ads. Specifically, PubMatic is a sell-side platform, which means it works with publishers to sell their display space.
What's plainly evident is that PubMatic is in the very early innings of its growth. As more content shifts to digital platforms, PubMatic has consistently shown that it can grow at double (or more) the rate of the overall ad-tech industry. In particular, connected TV and over-the-top programmatic ads should be the company's fastest-growing segment through at least mid-decade.
The valuation is also compelling, considering that the company can maintain a 20%-plus growth rate for years to come. PubMatic is already profitable on a recurring basis, and it can currently be scooped up for less than six times Wall Street's consensus sales for 2022.
Considering that the company's existing publishers spent 50% more in the most recent quarter, compared to the prior-year period, I'm feeling pretty confident that PubMatic could be worth a whole lot more in five years.
Lastly, I'm keeping a close eye on what I believe to be the premier name in cybersecurity: CrowdStrike Holdings (CRWD -0.28%).
The pandemic has shown the world how important it is for businesses of all sizes to protect their data. As workforces have gone remote, demand for data and identity protection has increasingly been placed on third-party providers. CrowdStrike, one of those key providers, has shown it's up for the challenge.
The star here is the company's cloud-native platform known as Falcon. Falcon leans on artificial intelligence to grow more efficient at recognizing and responding to threats over time. Since it was built in the cloud, it's often a more effective and cheaper cybersecurity solution than on-premises security products.
The proof is also in the pudding. In less than five years, CrowdStrike's subscriber count has grown from 450 to more than 13,000. The number of clients purchasing four or more of its cloud-module subscriptions has also grown from a high single-digit percentage to 66% over a similar time frame. Having clients add on to their existing services has pushed the company's subscription gross margin to the upper 70% range.
With cybersecurity offering some of the safest double-digit growth potential, CrowdStrike is a no-brainer for my potential buy list.