This year has been a tale of two markets for growth stocks. Large-cap growth companies with exposure to either artificial intelligence (AI) or weight-loss products have posted enormous returns for shareholders in 2023. Small- to mid-cap growth stocks, on the other hand, have softened in the face of rising interest rates and stubborn levels of inflation.
This marked divergence is evident in the performance gap between the Vanguard Growth ETF, which holds mostly large to megacap giants like Apple, Tesla, and Eli Lilly, and the Vanguard Small-Cap Value ETF, which invests mainly in smaller businesses like Bunge Limited and IDEX Corporation. The Vanguard Growth ETF has benefited from key themes like AI and obesity care this year, while the Vanguard Small-Cap ETF has lost ground in 2023 due to tighter credit conditions and a growing aversion to risk by investors.
Investors, however, may want to take a page out of Charlie Munger's playbook before chasing AI or obesity care stocks heading into 2024. Munger, the vice chairman of Berkshire Hathaway and Warren Buffett's longtime business partner, is well known for his use of the mental model known as "inversion."
By thinking about the opposite way you would normally perform a task, inversion can allow you to avoid costly mistakes. In this case, for example, it might be wiser to skew your portfolio toward promising growth companies that have been heavily sold off over temporary headwinds, rather than loading up on megacap AI/weight-loss companies with sky-high valuations and limited upside potentials.
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Here is a brief overview of two incredible growth stocks that might be significantly undervalued right now.
CRISPR Therapeutics: A leader in gene editing
CRISPR Therapeutics (CRSP 0.34%) is a clinical-stage CRISPR/Cas9 gene-editing specialist. Over the past three years, the biotech's shares have fallen by approximately 57%. However, CRISPR Therapeutics could land its first regulatory approval (exa-cel for sickle cell disease) before year's end. Moreover, it sports a value-laden pipeline of differentiated assets in rare diseases and cancer, along with a rock-solid balance sheet with approximately $1.8 billion in cash and cash equivalents.
Bears think the company's gene modification platform will ultimately be surpassed by other techniques like base and prime editing. But given its ability to shepherd a completely novel therapy from the bench to a regulatory filing in only 10 years, its close relationship with rare disease juggernaut Vertex Pharmaceuticals, and its expansive pipeline of high-value candidates, CRISPR Therapeutics deserves the benefit of the doubt from investors. This gene-editing pioneer, in fact, could be a hidden gem due to its first-mover advantage in a field poised to grow by leaps and bounds in the years ahead.
Intellia Therapeutics: Another gene-editing pioneer
Intellia Therapeutics (NTLA 3.70%), another player in the CRISPR/Cas9 gene-editing space, is also worthy of consideration. The biotech's shares have plunged by nearly 46% over the prior 12 months, despite a steady stream of encouraging clinical data for its lead candidates NTLA-2001 (indicated for transthyretin amyloidosis) and NTLA-2002 (indicated for hereditary angioedema). Both experimental therapies could be future blockbusters, or drugs capable of at least $1 billion in annual sales.
Where do things stand now? Intellia Therapeutics has designs on advancing NTLA-2001 into a pivotal stage trial in the coming months. NTLA-2002, on the other hand, is slated to begin a late-stage trial in the third quarter of 2024. The company also recently expanded its collaboration with Regeneron Pharmaceuticals to explore the use of in vivo CRISPR-based gene-editing therapies for neurological and muscular diseases. Lastly, Intellia Therapeutics exited the most recent quarter with $1.1 billion in cash and cash equivalents, giving it an ample cash runway.
What's the bull thesis? With a market cap hovering around $2.6 billion, Intellia Therapeutics stock might be absurdly undervalued right now. The company could have two potential blockbusters in late-stage testing next year, it has a rather favorable development and commercialization agreement in place for NTLA-2001 with Regeneron Pharmaceuticals, and its stock ought to benefit from an upcoming wave of gene-editing trial data from both its own programs as well as several of its competitors. In short, Intellia Therapeutics' hefty pullback could prove to be a gift for patient investors.
