(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of CELG.)
Celgene Corp. (CELG) shares fell nearly 30 percent since early October, but the stock could soon rebound by more than 15 percent.
The stock found a meaningful level of technical support at $100, and could be on the verge of a technical breakout. From a fundamental standpoint, Celgene shares were likely oversold and got too cheap.
Shares fell initially after Celgene discontinued a clinical trial for one of its lead drugs, causing it to trim its long-term revenue and earnings outlook when it reported its 3Q results at the end of October. This caused a sharp decline in the stock last month.
But the stock had some time to regroup and is showing signs of life and a potential breakout. (See also: Celgene's Sharp Sell-Off Is Likely Overdone.)
Celgene shares are at a critical resistance level at $102.50. Should the price rise above that resistance level, the stock has a clear path to filling the gap all the way to nearly $120 per share.
Fundamentally Too Cheap
Looking at Celgene's stock and its current price, the valuation of the shares are too cheap. Revenue estimates for Celgene were reduced by $1 billion for 2019, to $17 billion, implying a price-to-sales ratio of 4.75 times 2019 revenue estimates.
Meanwhile, 2019 earnings estimates have fallen by $0.35 to $10.40 a share, so Celgene shares trade at only 9.8 times 2019 earnings.
According to YCharts, Celgene is expected to see revenue growth of nearly 15 percent in 2019, and earnings growth of almost 20 percent. This means the current valuation for Celgene is too cheap.
Consider that Gilead Sciences Inc. (GILD) is expected to have zero growth in 2019 and earn $6.84 a share, giving the stock an earnings multiple of 10.6, while its revenue is expected to decline by 1 percent, to $21.93 billion in 2019, trading at 4.34 times sales.
A Market Mispricing
From that analysis, would it make sense that for roughly the same valuation you can buy a company with nearly 20 percent growth, at the same valuation as a company with no earnings growth? Or a company with almost 15 percent revenue growth for the same valuation as a company with declining revenue growth?
Of course it doesn't make sense, which is why Celgene shares were probably oversold, and a breakout could be on the way.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.