Buying on the dip can be a risky strategy because you can't know when a stock has reached bottom until after it has recovered from it. The danger is always that a struggling stock can fall lower in the weeks and months ahead. However, by investing in stable businesses with attractive growth prospects, you can minimize your overall risk over the long term.
A couple of good stocks that have fallen more than 30% in 2022 and could be worth buying today are ChemoCentryx (CCXI) and Meta Platforms (META 2.98%). Although they're down big right now, investors shouldn't count them out as long-term investments.
Image source: Getty Images.
1. ChemoCentryx
Biotech stocks can be risky buys because many of them don't have approved products that they can sell yet. ChemoCentryx used to belong in that category, but not anymore.
Last year, the U.S. Food and Drug Administration approved Tavneos to treat severe anti-neutrophil cytoplasmic autoantibody-associated vasculitis, an autoimmune condition. The drug has the potential to be a blockbuster -- with annual sales of $1.3 billion eventually -- and the company is also pursuing other indications for it, including hidradenitis suppurativa, where small lumps develop underneath the skin.
Even so, it will likely be a long road ahead for ChemoCentryx to turn a profit; last year, its net loss totaled $131.8 million on revenue of $32.2 million. The bulk of the top line came from collaborations and license-related revenue. Moving forward, investors should expect to see product-related revenue driving much of the growth.
At a market cap of less than $2 billion, ChemoCentryx is still fairly small, and it might seem that the risk is high here. However, one of the things I always watch for with a growth stock is its cash burn and how strong its balance sheet is. As of the end of last year, ChemoCentryx had cash, cash equivalents, and investments totaling $362 million.
That's significant when you consider that over the past year, the company only used up $76 million to fund its day-to-day operations. Even if you were to assume its cash burn rate didn't improve this year, ChemoCentryx would still easily be able to absorb that amount without having to take on debt or issue stock -- an important consideration for growth-oriented investors.
ChemoCentryx is full of potential over the long term. And with its low valuation and minimal debt on its books, it could even make for an attractive acquisition for a larger pharma company looking to bolster its pipeline.
Although the stock has fallen a hefty 34% thus far in 2022 (far worse than the S&P 500's decline of 5%), it's not as risky as it looks to be at first glance -- again, because the liquidity it has on hand is enough to cover its cash burn for a number of years. Investors will need some patience with this one, but ChemoCentryx is an investment that could pay off over the long term.
2. Meta Platforms
Meta Platforms, even with its own 30%-plus decline through the first three months of 2022, is still worth more than 350 times ChemoCentryx. The social media company that owns Facebook is much further along in its business, but it recently ran into a different kind of problem -- stalling growth numbers.
Although sales for the last three months of 2021 rose a healthy 20% year over year to $33.7 billion, the company saw a decline in daily active users (DAUs). The 1.929 billion DAUs for the latest quarter was a drop from 1.93 billion a quarter earlier -- the first such decline ever for the company -- and that has investors worried.
In addition, there are also concerns about changes to Apple's iOS mobile operating system. Users are now alerted more to tracking and can easily disable it, thus making it difficult for Facebook's advertisers to reach as many users as they might otherwise have expect. Meta projects that the change could result in a $10 billion hit to its top line this year. It's a strong headwind, but one that is baked into the stock price right now.
Meta is a money-making machine that I'm confident can handle this setback and still find ways to continue expanding its business in the long term (like focusing on the metaverse). Free cash flow was $12.6 billion last quarter; over the last four periods, the lowest that its free cash has been was $7.8 billion.
At a forward price-to-earnings multiple of 18, Meta is an incredibly cheap stock to buy right now. In the past, it wouldn't be uncommon to be paying much more than 20 times its future earnings. Despite all the negative press, this is still a business that looks solid and that investors should feel comfortable holding over the long term.
