After publishing my "4 Stocks in 4 Industries That Could Make Significant Gains in 2014" article a couple weeks ago, I looked throughout the market for further value. What I found was upside that was just as evident as my prior picks, and some to an even larger degree. Hence, let's look at four more stocks with a strong combination of value and upside that could lead to large gains in 2014, possibly even a double in valuation.
There's no debating that Priceline.com (NASDAQ:PCLN) has been one of the market's most talked about companies of 2013, almost doubling in market capitalization. However, 2013 has been good for the entire online travel space, as Orbitz, Tripadvisor, and Ctrip have all doubled in size. Yet, Expedia has been a laggard, posting gains of just 10%; but in 2014 it might present the most upside potential. In fact, it might even double.
Expedia has been anything but predictable in 2013, posting good quarters only to turnaround with a disappointing quarter three months later. Yet despite this inconsistency, Expedia is still on pace to return growth of 18% in 2013, and much of that growth is behind its European travel site Trivago, which is expected to grow 85% in this year alone.
Nonetheless, Trivago has added a much-needed spark, but Expedia continues to be a good company. In 2014 Expedia is expected to grow 14%, creating revenue of $5.42 billion, which means Expedia trades at just 1.62 times next year's sales.
In comparison, Priceline (with expected growth of 23% next year) trades at 7.3 times 2014 sales. Granted, Priceline is growing faster, but I don't think its growth is worthy of a 350% premium on Expedia. Not to mention, Expedia is cheaper based on future earnings, at 18 times versus Priceline's 23.5 times, and this despite having a profit margins of just 3% versus 28% for Priceline.com.
With all things considered, Expedia is not only significantly cheaper than Priceline.com, but it has the most room to improve and is growing much faster than the overall market. Thus, even if Expedia doubles in price it would still trade at just 3.2 times next year's sales-- still more than 50% cheaper than Priceline.com.
Given the fact that Priceline.com is more efficient and growing faster, it deserves a premium, but is not worth 350% more than Expedia. Therefore, if Priceline.com trades flat and Expedia doubles, Priceline.com will then trade at more than a 100% premium, which is far better than 350%, and is a better reflection of fundamentals. Thus, while Expedia at $140.00 might sound excessive, it would still be cheap relative to its peer, which is why investors shouldn't be surprised if it occurs.
Angie's List (NASDAQ:ANGI)
Before we look at the next pick, I'd like to start by saying that I am fully aware of the recent price-cut experiments that have occurred; I also realize that a former executive is now working at Groupon to roll-out service that could be a direct competitor; lastly, I have read the very thorough and negative reports by Citron Research. However, with Angie's List I am not making a call on the long-term performance of the company, or if it will exist in 10 years, but rather a call based on trend, valuation, and growth.
So with all speculation aside, the fact is that Angie's List looks very solid in the short-term. The company continues to have strong sign-up and renewal rates by customers, and more than 70% of its revenue comes from service providers who earn consistent business from the company's site. With that said, Angie's List is expected to grow 57.5% this year and another 36% in 2014.
As with all of my selections, valuation relative to catalysts and future fundamentals is the key factor to predicting upside potential.
2014 Expected Sales Growth
2014 Price/Sales Ratio
Keep in mind: the above chart is all based on future estimates and how it applies to a company's current valuation. Any of the above companies could easily make an acquisition, outperform expectations, or perform some other function that makes current estimates irrelevant. With that said, sales and top-line growth is what really drive social media stocks right now, as most companies in this space sacrifice profitability to gain market share with aggressive spending.
However, I think it's definitely worth noting how cheap Angie's List is relative to its peers, and with very similar growth. Therefore, even if shares double from its current price of $13.00, the stock would only trade at 4.8 times sales, which is still more than a 50% discount to any of its compared peers. Thus, it is very reasonable to imply that shares of Angie's List could double. In fact, I think Angie's List biggest risk at this point in time is if the social media bubble bursts. Although possible, Angie's List has the least to fall and the most to gain.
Most biotechs have one major catalyst-- that being late-stage data-- which is company changing in regards to market valuation. These catalysts are often years away, and in the months prior we usually see a pre-data rally with such stocks.
One example is NeoStem and, in biotechnology, I think it has the most upside potential among companies of similar size. The biggest reason is its drug, AMR-001, which uses CD34+/CXCR4+ cells to treat and repair heart muscles following a heart attack. A couple weeks ago the company announced complete enrollment, meaning that final data will be presented in six to eight months. If data is positive, NeoStem will be greatly positioned as a future leader in cardiovascular medicine, as the company announced its sixth granted patent in the U.S., many of which cover other indications, and gives AMR-001 a total of 16 patents surrounding its use.
Following the announcement of complete enrollment, I wrote an article entitled, "Why Is Complete Enrollment Important To NeoStem Investors?" I urge you to read this article, as it gives four main reasons that I expect data to be good when the company presents in the second quarter, which include:
- Prior data showing that no deterioration of heart muscle function occurred in patients given 10 million cells (threshold dose), compared to 30%-40% of patients who were given zero to 5 million cells.
- NeoStem's AMR-001 is structurally similar to Baxter's Phase 3 CD34+ product, which also treats a cardiovascular disorder, and reached endpoints that had never before been met.
- Dr. Losordo is the Chief Medical Officer at NeoStem, heading up the development of AMR-001. Losordo also developed Baxter's CD34+ product, which is a staple in Baxter's pipeline.
- The much feared CADUCEUS data is irrelevant; I presented a dozen reasons why CADUCEUS and AMR-001 are in no way, shape, or form comparable products, with the exception that both use "cells".
So clearly, AMR-001 data will be a huge catalyst, and I feel very confident in the company's chances of presenting good data. However, there is more to the NeoStem story, which includes the initiation of clinical studies for the company's TREG and VSELs in treating autoimmune disorders and for tissue regeneration. The company has enough cash to operate comfortably for two years, and the company's revenue-generating cell manufacturing business, also called PCT, announced agreements or expanded agreements with six new entities in 2013. Therefore, after revenue growth of 98% in 2012, and expected growth of 50% in 2013, analysts expect that sales will grow 44.2% in 2014, also serving as a catalyst.
Hence, NeoStem has a lot of catalysts in 2014, with the biggest being data on AMR-001; but like Restoration, value is what will ultimately create upside. First off, if we completely ignore the two key programs that will be initiating studies in 2014 and the fact that NeoStem trades at just six times 2014's estimated sales -- in a space trading at eight times sales -- we'll still find value based solely on AMR-001.
Analysts estimate that peak sales of AMR-001 will be between $1.2 and $1.5 billion if successful in clinical trials. Currently, NeoStem trades with a market cap of 200 million, or about 0.15 times its peak sales potential. Now, what we've seen in biotechnology is that expected blockbusters usually produce a price/peak sales ratio of 1.0 prior to FDA approval, only if the market expects an FDA approval. Last week, Aegis increased its price target from $21 to $23, citing confidence in the AMR-001 Phase 2 study. At $23 NeoStem would trade with a market cap of $625 million, or roughly 0.5 times peak sales, which likely takes into consideration that a larger study would be required, but is a good target to illustrate the perception-changing power that good data can have on a company.
A good example of a clinical trial's power to change a company's valuation, long-term, is Acadia Pharmaceuticals (NASDAQ:ACAD) with a market cap of $2 billion and peak sales estimates of $2 billion for its drug, pimavanserin. However, prior to pimavanserin's data in 2012, Acadia had a market cap of only $180 million. Therefore, after data the market rushed to properly value the company, which is what I expect if AMR-001 data is effective. Moreover, Acadia saw its stock trend higher from $1.08 to $2.22 in the year prior to data, something I also think is likely for NeoStem. So while the largest upside rests in whether or not AMR-001 is successful, investors should also like the stock's potential to see a pre-data run higher. Either way, this scenario and the year ahead make shares of NeoStem very exciting for 2014, both before and following data.
Consumer Portfolio Services (NASDAQ:CPSS)
The next selection is one that doesn't really have a comparable valuation peer, but is growing fast nonetheless, and priced significantly cheaper than companies with a similar growth rate.
The company is called Consumer Portfolio Services and it is a sub-$200 million company with average volume of roughly 100,000 shares traded. Hence, it is unknown, or very under-the-radar.
Consumer Portfolio Services, or CPSS, operates an automobile finance lending business. The company provides indirect financing to customers with limited credit histories, low income, or who have past credit problems. Thus, with auto sales on the rise, a low rate environment, and an increase in sub-prime borrowers, CPSS looks poised to rally and grow considerably.
Since 2011's boom in auto sales, CPSS has grown full-year sales from $132 million to $172 million expected for the full-year of 2013. In addition, operating margins have soared from negative 10% to positive 28.5% in the same period. Moreover, in 2014, analysts expect that sales will surge to $238.5 million, or growth of 38.8%.
The bottom line is that when the auto market is strong, and CPSS is firing on all cylinders, the company achieves strong growth and earns large profits. But to the contrary, when the market's bad, or if a sudden change occurs, CPSS is also drastically affected due to being highly exposed to high-risk clients and large sums of debt.
With that said, the auto market is expected to remain strong next year, and CPSS is trying diligently to boost the size of its total managed loan portfolio, which it's doing successfully. For these reasons investors should be optimistic about next year. And what makes this entire situation even better is that CPSS is trading at just 0.79 times next year's sales!
In comparison, the S&P 500 trades at 1.65 times sales, and the financial services industry trades at 2.2 times sales. Not to mention, CPSS trades at just 8 times next year's earnings, making this unknown stock a clear value investment. Much like all of the companies covered, CPSS could easily double and it would still be cheap relative to its peers and industry.
As I stated in my first "stocks to double" piece, the comparison of sales, future sales, and growth is important in identifying value in the market because these metrics are the only consistent between two different companies. In any given industry, companies are at different stages in the growth cycle, thus have different operational objectives. Therefore, one company might try to maximize profitability with cost cutting while another is boosting its spending to gain market share. Hence, price/earnings multiples are often irrelevant when comparing companies and seeking value, unless the companies are both mature in their business cycle.
With that said, all of these companies are cheap, but are cheap for a reason, as all have either frustrated investors in the past, have flown under-the-radar, or have produced inconsistent fundamentals at times. However, each company now finds itself in a scenario where value is so evident and to such a degree that large gains look highly possible. Furthermore, if the Warren Buffet saying is true, "If a business does well, the stock eventually follows", then each of these underperforming stocks could be in for a good year in 2014.