Sometimes bad things happen to good companies. Whether due to market forces or company-specific issues this can mean high-quality companies go into a funk.
And when they do it can present opportunities to buy their stock when they are down but not out. Eventually, their financial strength enables them to get back off the ground and become even stronger.
Here we look at three stocks that have had a rough go of it in 2020, but whose solid fundamentals point to better times ahead.
Can NortonLifeLock Fend off Competition?
NortonLifeLock (NASDAQ:NLOK) is down 28% this year. The maker of Norton anti-virus software and LifeLock solutions for personal and enterprise cybersecurity has been challenged by a flood of competition and anemic sales growth. It has not been alone.
Corporate customers are spreading their cybersecurity outlays over time these days instead making one big purchase. This has forced NortonLifeLock to rethink its strategy.
After a dismal performance in fiscal 2020, things are looking up. Revenue growth is expected to resume in 2021 when earnings are forecast to rebound 54% higher off a low base. Last quarter NortonLifeLock beat expectations on the top and bottom lines. The key average revenue per user (ARPU) metric increased and the cost structure improved.
This stock looks to be near an inflection point. Cybersecurity product demand is on the rise due to the prevalence of hacking events worldwide. It’s a business that is unfortunately here to stay.
Although NortonLifeLock faces more competition than when it was seemingly the only show in town many years ago, its customer base remains strong and its products are as valuable as ever.
The company has opportunities to grow both domestically and overseas (where it generates over half its revenue) especially in the small business segment. Small businesses are increasingly working remotely and demanding stronger IT safety. Their willingness to spend and NortonLifeLock's new small business offerings should be the perfect storm for meaningful growth in the quarters ahead.
Unlike many upstart competitors, NortonLifeLock is generating profits. Its gross margin is increasing which is leading to a higher return on assets (ROA). More work needs to be done on the balance sheet though. The $2.5 billion debt balance represents is roughly 2.5 times its cash position.
Nevertheless, the price tag of 13x forward earnings makes Norton one of the least expensive stocks in the technology security space. Patient investors willing to ride out this turnaround story and collect an above-market 2.7% dividend in the process can lock in some nice long-term gains.
Is Biogen Stock Worth the Risk?
Biogen (NASDAQ:BIIB) is another company that’s had a tough year, but remains fundamentally solid. As a high volatility biotech, the stock tends to fluctuate wildly based on the latest clinical pipeline developments.
Biogen's aducanumab drug candidate for the treatment of Alzheimer's disease is the key growth catalyst. Earlier this month Biogen shares surged on news the FDA granted a priority review of the drug—only to come crashing down days later after FDA advisers recommended not to approve aducanumab.
While the prospects have dimmed for Biogen's Alzheimer's program, there is still a chance for a reversal in opinion. The FDA's final decision on the treatment is expected to come by March 2021.
Beyond this, Biogen's multiple sclerosis (MS) franchise remains strong. It now has several drugs on the MS market and others in the pipeline. Competitors' generic offerings threaten to erode sales of Bigoen's main Tecfidera product, however, and is a development to stay on top of going forward.
Biogen has other promising drug candidates in its neurology pipeline including potential treatments for Parkinson's disease. Next year will undoubtedly be a big year for the company with six mid-to-late stage clinical programs expected to announce data.
So, while the headlines around the FDA and Biogen's Alzheimer's candidate will dictate near-term performance, the longer-term picture is bright. The company has the healthy financials to bounce back from any further Alzheimer's setback with a $3.6 billion cash position, a manageable debt level, and strong operating cash flow.
The valuation on Biogen is the most attractive its been in a while as the market is braced for the worst-case scenario of an unfavorable FDA ruling. It’s a gamble to start a position ahead of this news, but if the tide turns and positive news is announced, Biogen will probably not be this cheap again for the foreseeable future. Investors with a long-term horizon just may want to take that risk with the stock trading at only 7x forward earnings.
How are Southwest Airlines Financials?
Investors that 'wanna get away' from risky biotech stocks should consider Southwest Airlines (NYSE:LUV). The low fare airliner's struggles have been well documented this year amid the slowdown in the travel industry.
But with vaccine developments gaining momentum, the outlook for the tourism and leisure space is improving. Travel demand will at some point return and when it does it will likely return with a vengeance. Pent-up demand for vacations and other pleasure travel as well as the return of some business travel could drive some big quarterly results at Southwest.
Why Southwest and not the other airlines? Southwest is a standout company when it comes to fundamental quality. It sits on $14.6 billion in cash which dwarfs its debt balance of less than $1 billion. A healthy balance sheet with ample liquidity has given management the confidence that it will not need to lean on government loans to survive.
Moreover, Southwest is getting ahead of the potential for crowded terminals by expanding into new markets in 2021. It is pulling into the gate at Sarasota top make the airport its 10th Florida location and extending its network in Georgia with new service to and from Savannah. Meanwhile, the addition of Long Beach to Honolulu fares will provide another option for sun-seeking travelers.
Unlike its less financially stable competitors, Southwest has been able to make moves like these because it has greater operational flexibility. As travel restrictions are loosened and vaccine availability becomes more widespread, look for Southwest to be a major beneficiary of the travel rebound. Investors should consider booking a position in this high-quality company before the stock starts to take off.
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