This article is an update to my original article on Celgene (CELG) published on June 22, 2017. Celgene reported their financial results yesterday October 26, 2017, and although the quarter was good, lowered guidance crushed the stock price. In my opinion, some of the sag in price was justified, but for the most part an overreaction. Celgene is still a fast-growing company and I believe that current valuation is in alignment with the company’s true worth. Therefore, I believe the company continues to offer the long-term oriented growth investor with potentially attractive returns.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Nevertheless, although Celgene did lower future guidance out to 2020, they are still forecasting high future growth-just not quite as high as previously. Therefore, I thought it would be useful to provide an updated forecasting video on Celgene with the lowered guidance figures included. Hopefully, this will assist Celgene investors with formulating a clearer perspective on what the long-term impacts of this lowered guidance might really mean. I believe you will find that the fear appears greater than the reality.
Celgene: Calculating Future Performance Based On Updated Guidance
Summary and Conclusions
In my previous article on Celgene I summarized my thoughts on investing in growth stocks like Celgene as follows:
“Truly successful growth stocks are capable of producing game-changing, long-term returns for investors. Nevertheless, investing in growth stocks can be tricky and price action very volatile in the short run. Moreover, a true fast-growing business is capable of supporting higher P/E ratios than traditional blue-chip, dividend-paying stocks. However, from a valuation perspective, it’s important that investors recognize that the P/E ratio of a growth stock should be relative to and related to its earnings growth potential.”
“Wall Street has generated the acronym GARP (Growth At a Reasonable Price) for valuing growth stocks. It is a fact that you can pay higher valuations for growth stocks, but even with growth stocks, valuations need to be reasonable enough to support future returns that are commensurate with the risk associated with investing in them. When investing in growth stocks, the future is more important than the past.”
I think the above summary remains as valid today as it did when it was first written. Currently, the future prospects of growth for Celgene have been moderately reduced. However, the company’s pipeline is rich and there is still the possibility for future upside surprises and announcements. Investors interested in learning more can check out the companies slide deck from their recent earnings release found here.
Investing in high-growth stocks, especially high-growth biotechnology stocks is risky. Valuations are usually higher than average companies, and reactions to positives and/or disappointments often severe in the short run. On the other hand, in the long run, future performance will be directly related to earnings growth achieved coupled with rational valuation.
Disclosure: Long CELG at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Article by F.A.S.T. Graphs