FOCUS
LAM RESEARCH
SVB FINANCIAL GROUP
SUPERNUS PHARMA.
CENTENE
15.9%
9.0%
13.2%
18.6%
–10.1%
–40.7%
–49.0%
–34.3%
PRICE-TO-
EARNINGS RATIO
ESTIMATED EPS
GROWTH*
STOCK PRICE COMPARED
WITH 52-WEEK HIGH
*ANNUALIZED, PROJECTED OVER NEXT THREE TO FIVE YEARS ALL DATA AS OF 8/7/19. SOURCE: S&P GLOBAL
14x
9x
15x
16x S&P 500:
22 x
S&P 500:
5. 7 %
INVEST
44
FORTUNE.COM // SEPTEMBER 2019
to tech-focused venture capital investors.
Compared with other regional banks, SVB has
a particularly large portfolio of variable-rate
loans, whose interest payments fall when pre-
vailing rates decline—which makes it vulner-
able to broader cuts by the Federal Reserve.
The run-up to the Fed’s July rate cut led SVB
to lower its forecast for interest-related profits
for 2019, and some investors fled; the stock is
down 39% over the past year.
Piper Jaffray analyst Brett Rabatin believes
the worst is likely over. At this point, he says,
interest rate news “is more than priced in” to
the stock. What hasn’t changed? The strength
of SVB’s main revenue source. Venture capital
investment reached $66 billion through the
second quarter of this year, on pace for its sec-
ond-best year ever. The stock is currently priced
in line with other regional banks, at nine times
earnings, but Rabatin believes it will deserve a
premium once the interest rate shocks recede.
Centene (CNC, $49) has been among the
country’s fastest-growing health insurance
companies in recent years. Its shares have
fallen 15% year to date, however, in part be-
cause many investors believe it overpaid in its
$17 billion purchase of WellCare, a provider of
Medicare- and Medicaid-affiliated health care
plans. But skeptics miss one of the acquisi-
tion’s big benefits: WellCare’s pool of Medicare
Advantage customers. Jefferies senior analyst
David Windley calls these public-private hybrid
plans the “Goldilocks” of the health insurance
space—more profitable than Medicaid plans,
and growing faster than most other health plan
categories as more baby boomers age into Medicare. The purchase of
WellCare, which is pending regulatory approval, will double the size
of Centene’s Medicare Advantage business, Windley calculates. That’s
a major reason that analysts’ consensus estimates show Centene’s
earnings per share growing 18.6% annually for the next three to five
years, compared with just 5.7% for the S&P 500.
Some companies sport low valuations because of where they sit
in their business cycle. Lam Research (LRCX, $200) makes equipment
found in many kinds of chips, including those that power iPhones
and a range of artificial intelligence applications. It’s an industry
that rises and falls on innovation booms and supply gluts. After
stratospheric growth in its previous two fiscal years, Lam’s sales
fell 13% in its fiscal 2019, which ended June 30. But its stock has
begun to rally as investors anticipate the next rebound. Prices for
NAND memory chips, which account for nearly half of Lam’s rev-
enues, have risen over the past month for the first time since 2017.
“It’s a good sign,” says KeyBanc Capital Markets analyst Weston
Twigg, who forecasts a 12% rise in revenues for Lam in 2020.
In pharmaceutical stocks, finding a bargain can mean making
a contrarian bet on a disfavored drug. Maryland-based Supernus
Pharmaceuticals (SUPN, $29) has staked much of its future on two
drugs designed to fight ADHD. One, a non-stimulant dubbed
SPN-812, has shown the ability to alleviate symptoms within
a week during trials—a big differentiator, since similar non-
stimulants can require a month or more to take effect. Investors
were unnerved, however, by the drug’s Phase III clinical trials, in
which higher doses had no additional positive effect. Over the past
year, Supernus’s share price has sunk 47%.
Esther Hong, an analyst for Janney, argues that the market has
been too pessimistic: Despite the dosage hiccup, both SPN-812 and
Supernus’s other ADHD drug have shown positive results. Hong
believes SPN-812 could be a billion-dollar drug in the long term if,
as anticipated, it wins FDA approval and launches next year. That
could offer a portfolio-burnishing boost for investors in a company
with a current market capitalization of just $1.5 billion.
PRICED TO MOVE
These stocks are priced at a discount to the broader market, even though their growth prospects are far better than average.
