This article is an update to my original article on Celgene (CELG, Financial) published on June 22. Celgene reported its financial results Oct. 26, and although the quarter was good, lowered guidance crushed the stock price.
Some of the sag in price was justified, but for the most part it was an overreaction. Celgene is still a fast-growing company and current valuation is in alignment with the company’s true worth. Therefore, the company continues to offer the long-term growth investor potentially appealing returns.
Nevertheless, although Celgene did lower future guidance to 2020, it is still forecasting high future growth, just not quite as high as previously. 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. You will find that the fear appears greater than the reality.
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 (price-earnings) 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.”
The above summary remains as valid today as it was when it was first written. Currently, the future prospects of growth for Celgene have been moderately reduced. But 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 company's slide deck from its 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 Celgene 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 adviser as to the suitability of such investments for his specific situation.
