Growth stocks, on balance, performed poorly over the course of 2022. Stubbornly high levels of inflation, rising interest rates, kinks in the global supply chain, and geopolitical unrest drove investors away from risky growth equities and into more defensive plays like blue chips and dividend stocks last year.
Speaking to this point, the growth-oriented Nasdaq Composite index lost a staggering 33% of its value in 2022. This tech-heavy index, however, has shined since the start of 2023. Thanks to easing inflation levels, the possibility of smaller-than-expected interest rate hikes this year, and resilient consumer demand, the Nasdaq just posted its highest January gain in 21 years.
The crux of the situation is that the modestly improving macroeconomic landscape appears to be causing some short-sellers to rethink their strategy in 2023. Shorting growth equities was an extremely lucrative and almost "can't miss" play last year for the reasons mentioned above.
However, scores of tech-based stocks are now trading at bargain-basement prices from a fundamental standpoint. These attractive price points, combined with a somewhat milder economic climate, could make growth equities less appealing to short-sellers, and perhaps spark a wave of bargain buying as the year progresses.
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Which growth stocks are top buys as these tailwinds start to take hold? The Nasdaq-listed biopharma stocks Reata Pharmaceuticals (RETA) and Travere Therapeutics (TVTX -3.17%) both have major catalysts in February that could cause their shares to shoot upward. Here is what investors need to know right now.
Reata Pharmaceuticals
Reta is a clinical-stage biotech nearing a potential game-changing regulatory decision from the Food and Drug Administration (FDA). Specifically, the agency is set to decide the regulatory fate of the company's Friedreich's ataxia candidate, omaveloxolone, by Feb. 28, 2023.
Reata's shares have already climbed by 74% over the prior 12 months in anticipation of this catalyst. But the biotech's stock might soar by another 165% if the FDA approves omaveloxolone for this inherited nerve disorder, according to analysts at Goldman Sachs.
What's all the fuss about? Friedreich's ataxia, while exceedingly rare, represents a high unmet medical need. The long and short of it is that this rare genetic disease has proven to be extremely difficult to treat. Omaveloxolone, in turn, would have a virtual monopoly in a market currently valued at approximately $3 billion a year. To put this commercial opportunity into context, Reata's market cap at the time of this writing is only $1.58 billion.
Bottom line: Reata's shares ought to take flight on an approval for this high-value indication. That being said, there is no guarantee the FDA will green light omaveloxolone later this month, which is a risk factor that investors should carefully consider before buying shares.
Travere Therapeutics
Travere is another rare-disease specialist with a major regulatory decision on tap this month. The company expects to learn the U.S. regulatory fate of its immunoglobulin A nephropathy (IgAN) candidate, sparsentan, by Feb. 17, 2023. IgAN is characterized by the buildup of an antibody called immunoglobulin A in the kidneys, leading to inflammation and a lowered filtration capacity by the kidneys. If approved, Wall Street thinks this drug could generate $1.4 billion in peak sales for this indication.
What's the upside potential? The financial services firm Canaccord Genuity recently updated its price target on the stock at the end of January. The firm's $40 price target implies a 78% potential gain from current levels. That's not unreasonable in light of the unmet medical need represented by IgAN at the moment, and sparsentan's sizable commercial opportunity as a result.
What's the downside risk? Travere's shares have yet to build in much of a premium ahead of this upcoming regulatory event. The biotech's stock, after all, is presently trading at about 6.4 times trailing-12-month sales. That's not an astronomical premium for a company with a potential blockbuster drug under review.
So while Travere's stock will likely take a step backward in the event the FDA rejects sparsentan, the company's ongoing commercial operations, other late-stage assets, and fairly reasonable valuation ought to soften the blow in a worst-case scenario.
