Warren Buffett is noted for saying, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” to which we might add, it’s even better to buy wonderful companies at wonderful prices.
We’ve tasked three Motley Fool contributors to come up with just that: three great companies that are on sale, that you can buy today. Let’s find out why Dollar General (NYSE:DG), Vertex Pharmaceuticals (NASDAQ:VRTX), and Under Armour (NYSE:UA)(NYSE:UAA) fit the bill.
A dollar and a dream
Rich Duprey (Dollar General): While the deep-discount end of the retail market is competitive, the segment is also attractive because its low price points make it fairly impervious to the ups and downs of the economy. And among companies in the sector, Dollar General seems to be the most promising.
Dollar General plans to open 1,000 stores this year and remodel another 900. That forms the basis for its assumption that it can grow square footage at 6% to 8% a year, helped along by same-store sales growth between 2% to 4% annually. The combination of the two ought to help Dollar General grow annual sales in the range of 7% to 10% and earnings-per-share growth in the range of 10% to 15%.
This is ambitious, but the dollar-store chain has a solid financial footing from which to accomplish its objectives. Moreover, it will also be able to buy back its stock and pay dividends to boot. Currently, Dollar General’s payout of $1.04 per year yields 1.5%, which won’t burn up any charts, but it will provide a consistent return to shareholders. With its stock trading nearly 30% below its 52-week high, Dollar General looks like a great opportunity at a great price.
Keith Speights (Vertex Pharmaceuticals): Last year was something of a disappointment for Vertex Pharmaceuticals. Higher-than-expected patient discontinuation rates of cystic fibrosis drug Orkambi rattled investors, as did lower-than-expected patient compliance rates. In addition, the biotech had to cancel a late-stage clinical study after its experimental drug combo proved ineffective.
Vertex seems to have put the past behind it now, though. The biotech is enjoying a great year in 2017 so far, with shares soaring in the ballpark of 50%.
Much of the newfound excitement stems from Vertex’s recent announcement of positive results for a combination of Kaledyco and tezacaftor in treating cystic fibrosis in two different late-stage studies. In both studies, patients taking the experimental drug combo experienced significantly improved lung function. The combination therapy was also generally well tolerated in both studies.
The aspect of the two studies that particularly pleased investors was that the patient discontinuation rates were low, and even similar to the discontinuation rates of the placebo groups. This is key for Vertex in light of the problems experienced thus far with relatively high discontinuation rates for Orkambi. Vertex plans to file for regulatory approval in the U.S. and Europe for the Kalydeco/tezacaftor combo.
Analysts expect the biotech should be able to grow earnings by nearly 70% annually over the next several years with Orkambi, Kalydeco, and the new combination therapy on the market. Although Vertex’s stock currently trades at 35 times expected earnings, the sizzling growth the company should enjoy make this stock a bargain. But at the rate Vertex’s shares are rising, it probably won’t be a bargain for too much longer.
One stumble does not a broken leg make
Rich Smith (Under Armour): Today I’m going to break with a long tradition of bashing Under Armour (NYSE:UA) (NYSE:UAA) stock as overpriced and overhyped. Instead, I’ll suggest that this stock, now selling for less than half of its retail price of just one year ago, may be on sale — and that maybe it’s time to consider buying it.
This reversal of opinion does not come easy to me. I’m a creature of habit, and just plain used to thinking of Under Armour as an overpriced stock not deserving of further attention. But consider the following facts.
Last April, Under Armour stock was selling for nearly $47 a share. Today, it costs just 42% of that price — nearly a 60% discount off of the “rack” price. And yet, Under Armour remains a terrific growth story, having increased earnings in every year (but one) over the past 15 years. And even in that one year (2008, the year of the financial crisis), Under Armour grew its revenues, even if profits did not rise in tandem.
So, if that’s true, why is Under Armour on sale today? Basically, because it committed the twin cardinal sins of (1) “missing” on earnings last quarter and (2) guiding investors to less profit this year than they had been expecting. As a result of this, Under Armour stock now sells for just 32.5 times trailing earnings — a level of valuation we have not seen since 2010.
Does Under Armour deserve to sell this cheaply? Does one year’s (relatively) poor performance mean the stock will remain forever in the discount bin? Not necessarily. While 2017 growth looks tepid, CEO Kevin Plank has promised investors that he will return Under Armour to 20% growth in the future.
Now, I personally have never understood investors’ willingness to pay P/Es far in excess of 20 times earnings for 20%-ish growth rates at Under Armour. But historically, investors have proven more than willing to pay exceedingly high prices when Under Armour delivers those kinds of growth rates. If you believe the CEO can deliver on his promise, then you have to believe that Under Armour stock is on sale today — and that it will sell for much higher prices as soon as its sales growth returns.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Under Armour (A and C shares). The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.