Growth stocks are a central component of any well-rounded portfolio. However, growth stocks are also inherently risky, necessitating that investors take extra caution prior to buying shares of any pure-play capital appreciation vehicle.
Which growth equities sport favorable risk-to-reward profiles right now? While there are plenty of candidates to choose from in this volatile market, Ginkgo Bioworks (DNA 10.60%) and Harmony Biosciences (HRMY 1.35%) arguably stand out as two of the most attractive at current levels. Here's why risk-tolerant investors with an eye toward market-beating gains may want to load up on these two undervalued healthcare stocks in the fourth quarter.
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Ginkgo Bioworks: An underappreciated biotech
Ginkgo Bioworks is an industrial biotechnology company. It reports earnings via two segments: Cell Engineering and Biosecurity. The company's research, development, and manufacturing services cover a wide variety of areas such as agriculture, drug discovery, industrial manufacturing, and, of course, biosecurity. Ginkgo Bioworks earns money through collaboration and manufacturing deals with private clients and government agencies in the U.S. and abroad. Its impressive client roster includes industry titans such as Alphabet (via Google Cloud), Merck, Pfizer, and Novo Nordisk.
What's the investing thesis? Since its IPO a little over two years ago, Ginkgo Bioworks stock has slumped by an unsightly 83%. The biotech's falling share price over this period is the result of several factors, such as the 2022 bear market that pummeled growth-oriented equities at large, a marked shift away from cash flow negative companies by investors over this period, and the apparent evaporation of "deep value" from the market's lexicon.
None of these negative headwinds reflect Ginkgo Bioworks' progress over the prior two years, however. In stark contrast, the company has actually been steadily building a world-class portfolio of clients, improving its facilities to attract additional clients, and garnering the attention of all-star investors like Cathie Wood.
The bottom line is that Ginkgo Bioworks is building a novel bio business capable of generating billions in annual revenue. Speaking to this point, its cell engineering and biosecurity units have already attracted multiple partners with deep pockets, and both of these sub-industries are expected to grow at a rapid clip in the years ahead.
Ginkgo Bioworks does have some unique risk factors as a pioneer in the emerging industrial biotechnology space. But the overall trend for its core value drivers ought to be upward over the next 10 to 20 years. Hence, this low-priced biotech stock screens as an attractive buy-and-hold for folks with an extended investing horizon.
Harmony Biosciences: A multi-catalyst pharma play
Harmony Biosciences is a rare neurological disease specialist. The company's U.S. Food and Drug Administration (FDA)-approved narcolepsy medication, Wakix (pitolisant), has been capturing market share at a breakneck pace since hitting its commercial launch, and it is potentially on track to eclipse the $1 billion sales mark well before the end of the decade in this setting. Harmony Biosciences hasn't been sitting still, however. The company has been using the drug's sales to fund additional trials to possibly expand its commercial opportunity by perhaps another $1 billion annually.
Why is this biotech stock an attractive buy? Harmony Biosciences stock stands out as an appealing equity for five reasons:
- It is profitable despite heavy investments in pipeline development.
- Wakix's sales are on track to rise by an astounding 51% over the course of 2023 and 2024.
- The company has a robust balance sheet with nearly $430 million in cash.
- The drugmaker plans on reporting updates for multiple clinical trials in the final quarter of 2023.
- Its shares are a bargain at only 12.3 times forward earnings.
All told, Harmony Biosciences screens as a fundamentally sound growth stock with an exceptionally bright outlook. That being said, it has attracted some criticism from short-sellers, which is the core reason for its below-average valuation. Prospective investors, in turn, might want to keep any starter position on the small side until this important headwind is resolved.
