A perfect investment opportunity is an opportunity where all the stars align to make you pull the trigger when there are no reasons not to. In my case, the stars align when a company fills these 3 criteria:
- An insider (owner, executive working at the company or the board) buys shares.
- It scores enough on the Rookie Investor´s scorecard to enter the "buy" bucket.
- It is undervalued or fairly valued (aka "margin of safety").
Enters Vertex Pharmaceutical, one of its directors, bought almost 3 million USD in shares this month. It scores 13 on the rookie scorecard (which is good). It is significantly undervalued (according to GuruFocus Fair Value model). As a bonus, Zacks ranks it as "strong-buy". It fills all three criteria, but what is this Biotech firm about?
What is Vertex Pharmaceutical about?
Its business is to research, develop, manufacture, and commercialize small molecule medicines for patients suffering from cystic fibrosis mainly. The drug has the capacity to transform a progressing and deadly disease into a controlled condition, and it is the sole firm that sells medicines to treat Cystic Fibrosis (CF) that way.
Vertex introduced its first CF therapy, Kalydeco, in 2012, benefiting only a small percentage of the entire CF population. Trikafta, which the firm introduced in 2019, is a three-drug combination therapy that increases the percentage of CF patients who can benefit from Vertex medicines to about 90% overall. The firm isn't going to stop with cystic fibrosis, and expanding to additional diseases may provide lots of space for growth.
This makes it a good business to own in an inflation era, as its pricing power is almost unlimited.
Its financials are as good as you can get, with good margins, sustained growth, low debt, and great growing returns on capital. All of this explains why Vertex has so much cash on hand. Recently, they used it to invest $900 million in CRISPR Therapeutics (NASDAQ: CRSP) to spearhead the development of CTX001, a potential experimental therapy for sickle cell disease and beta-thalassemia. The collaborators presented strong evidence of long-term effectiveness for the first 22 patients treated shortly after extending their partnership.
Why has its stock price fallen?
Its valuation decreased by 15% this year, while the S&P increased by 15%. So what spooks investors?
The one major concern that many investors have regarding Vertex Pharmaceuticals these days is revenue prospects outside of its primary cystic fibrosis (CF) business. For the time being, the company's sole marketed medicines are for cystic fibrosis. Vertex is also advancing candidates through the pipeline in other areas such as blood diseases, pain, and alpha-1 antitrypsin deficiency, a rare lung and liver illness. However, thus far, such pipeline initiatives haven't allayed investors' fears. In a phase 2 study, Vertex's investigational alpha-1 antitrypsin deficiency (AATD) medication VX-864 was not successful enough to progress to late-stage testing.
Even with a minus 2 for product concentration on the Rookie scorecard, Vertex manages to score high thanks to its astonishing financials, moat, low valuation and positive insider signals. The Rookie investor conducts this scoring every day for a shortlist of +200 promising stocks. If you want to find the score for other stocks, search here.
The most pessimistic analyst set a price target of 175$, 10% below today´s price, while the most optimistic set it at 331$, 70% above today´s price. This company is good to hold during an inflation period like right now (see why). If insiders are jumping into it, there is a high probability they will see promising results in their new drugs developments. I am opening a position in Vertex, equivalent to 2% of my portfolio.
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The author of this post owns shares of VRTX. The Rookie Investor recommends VRTX. The Rookie Investor has a disclosure policy. This article by The Rookie Investor is not financial advice as it does not consider your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. eToro is a multi-asset platform that offers both investing in stocks and crypto assets and trading CFD assets. Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. It would be best to consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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