- Technology gives investors more tools and applications than ever to filter the market for possible investment ideas.
- Unfortunately, these "filters" can miss equities that are expensive by last year's earnings but cheap by the profits the company will deliver in the current year.
- Profiled below are two fast-growing companies that are much cheaper than they appear and have significant upside.
One of the things that technology has enabled is the mass filtering of stocks to find equities that meet or exceed pre-specified selection criteria. Investors use the results from these filters as a starting point for possible new investments.
The most popular of these selection criteria is the current price-to-earnings ratios. The huge downside to this method is filters tend to miss companies that are expensive measuring valuations by past earnings but that are cheap by the earnings the company should post in the near future. I know if I would have filtered by this popular measure, I would have missed some of the biggest winners in my portfolio.
Here are two stocks that are much cheaper than they appear using this year's expected earnings and not last year's.
I am a huge "pound the table" bull on Gilead Sciences (NASDAQ:GILD), as my regular readers know. However, every time I pen an article on one of the cheapest large cap growth plays in the current market, I get at least one or two comments that the stock is trading at more than 30 times trailing earnings.
True enough, the company is also tracking to more than tripling earnings on back of a doubling of revenue in 2014, on the back of its new blockbuster hepatitis C drug, Sovaldi. Based on what the company is likely to make in 2014; the stock is selling at just over 13 times earnings; a 25% discount to the overall market multiple.
The best part is the Sovaldi roll-out is just getting started. It is not being marketed yet in Japan or Europe; two very large and important markets. Nomura just raised its peak sales estimates for Sovaldi from $16 billion to $22 billion by 2018. It also moved its price target to $141 a share from $130 previously.
To put those sales figures in perspective, this is about the revenues the company should post this year (Sovaldi is currently approximately 50% of overall sales). It is also twice what Gilead paid for Pharmasset in 2011, which was the developer of Sovaldi.
Micron Technology (NASDAQ:MU) is another stock that is much cheaper than it appears. The company actually posted a small loss last year, and therefore, is not showing up in investors' filters screening by price-to-earnings. However, the company is tracking to over $3 in earnings per share here in 2014.
The stock is cheap at just over 10 times this year's earnings, more than 40% below the overall market multiple. The company is also benefiting by the consolidation of the DRAM marketplace, which has gone from myriad players to just three major ones (one of which is Micron), which is leading to greater price discipline. As noted in a previous article, several analysts have put a $50 a share price target on this tech play, implying the current rally has much further to run.
The technology and applications currently available to investors are a trend I applaud and utilize. However, investors should not let this technology blind them to opportunities in fast-growing firms filters might miss. They are a starting point, not an end.
Disclosure: The author is long GILD, MU. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.