In a bull market, many growth stocks get a huge amount of positive momentum. Yet just because a stock is hitting new 52-week highs doesn't mean that it's a smart investment. Often, high-flying stocks are the ones that fall to earth the hardest.
To help you identify some risky stocks before they give up their gains, we turned to three Motley Fool contributors to identify companies they have concerns about. Read why they're worried and see if you agree or take issue with their conclusions.
Selena Maranjian: GW Pharmaceuticals (NASDAQ:GWPH), developing drugs based on marijuana-derivative cannabinoids, has seen its stock surge more than 75% over the past year, and many investors have high expectations for continued growth.
I'm not ready to buy shares for myself, though, and if I owned some I would think of selling -- even though the company does have the potential for great growth. So what's the problem? Well, like many biotechnology companies, it's got far more potential than actual performance.
Its Sativex drug, tackling multiple sclerosis and cancer pain, is approved in the European market for MS spasticity but has not yet won FDA approval. It's still in phase 3 trials for treating cancer pain, with one such trial yielding disappointing results. The company's rich pipeline also features Epidiolex, in development to treat epilepsy, and with trial results so far that are promising -- seizure reductions of up to 52% in some cases. GW Pharmaceuticals is also targeting glioma (a type of brain cancer), type-2 diabetes, schizophrenia, and ulcerative colitis, and just received Orphan Drug Designation from the FDA for Cannabidiol to treat Neonatal Hypoxic-Ischemic Encephalopathy. Some of those conditions have blockbuster drug potential.
If one or more of the drugs in development prove to be effective and safe and win FDA approval, GW Pharmaceuticals will be a more appealing portfolio contender for me. Right now, it's still burning cash -- increasing amounts of it -- and its annual revenue is only about $31 million, which makes the stock seem overvalued, given its market cap north of $2 billion. It's a company worth watching, but I'd rather park my money in companies with more certain futures, not to mention profits.
Sean Williams: To say that Incyte's (NASDAQ:INCY) run higher has been incredible would be nothing short of an understatement. Less than two years you could have purchased a share of Incyte for less than $20. Now that same share will run you as much as $107 as of this writing.
Fueling Incyte's mammoth run is Food and Drug Administration-approved drug Jakafi, which is labeled to treat myelofibrosis and polycythemia vera, and a robust oncology pipeline with 20 ongoing clinical trials. Incyte also has baricitinib as an anti-inflammatory drug hopeful that's in three clinical trials. With revenue growth expected to average 30% or higher between 2014 and 2018, it's easy for Wall Street and current shareholders to be excited.
As for me, if I were a shareholder I'd consider locking in those profits and heading for the exit. In my opinion, if the valuation isn't a major concern, then the competition certainly is.
The big revenue driver for Incyte at the moment is Jakafi for myelofibrosis, a type of bone marrow cancer characterized by the buildup of excessive fibrous scar tissue in the bone marrow. Jakafi is part of a class of drugs known as JAK inhibitors that has been shown to manage some of the symptoms associated with myelofibrosis and have led to clinical improvement. However, no partial or complete responses were observed with JAK inhibitors.
Geron, though, which recently partnered with Johnson & Johnson's subsidiary Janssen Pharmaceuticals, has a drug in development known as imetelstat that has delivered partial and complete responses in clinical studies. It's possible that imetelstat could make Jakafi obsolete by the end of the decade if it maintains its strong results in ongoing studies while also delivering adequate safety.
Additionally, with just $1.7 billion in sales expected by 2018, Incyte is already valued at more than 10 times its 2018 sales forecast. That's a big pill to swallow for a company with just one approved drug across two indications, and with a pipeline that's predominantly still in its early stages of development. I believe investors would be wise to avoid this growth stock.
Dan Caplinger: It used to be that being on an airplane was the last refuge for those who wanted to disconnect from the modern world, but Gogo (NASDAQ:GOGO) has worked to put a stop to that with its in-flight Wi-Fi Internet service. For a while, Gogo has earned itself a head-start in capturing a captive audience with its service, and the company's share price has nearly doubled over the past year as investors get more excited about its future prospects.
The challenge that Gogo faces is whether it will be able to keep lifting prices high enough to justify the investment in capital-intensive service like satellite network coverage in order to expand bandwidth. Gogo has to walk the line between giving users a fast enough connection to justify paying for service while not overcommitting to spending too much to make it happen -- while at the same time being aware of the potential for competitors to step in and duplicate its efforts. The fact that AT&T explored the possibility of getting into the business yet hasn't really followed through suggests that Gogo does in fact have a competitive moat, but with profitability still years away, the company faces plenty of future threats that investors can't even contemplate at this point. Speculative investors might see Gogo as a solid bet, but for most, the risks outweigh the rewards at current prices.
Dan Caplinger has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. Selena Maranjian owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.