Editor’s Note: Related tickers: Netflix, Inc. (NASDAQ:NFLX), MarketAxess Holdings Inc. (NASDAQ:MKTX), Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA)
It was hard to find a stock that traded higher on Monday as the market was pushed significantly lower following disappointing data from China and a hit in the gold market. Although far and few between, there were some stocks that traded against the trend to post gains. Many of which were pushed higher by the calls of analysts. In this piece I am looking at the calls from analysts to determine if these calls were good or bad, and how investors should play it.
Image: Netflix, Inc. (NASDAQ:NFLX)
Good Call but Expensive Stock
MarketAxess Holdings Inc. (NASDAQ:MKTX) traded higher by almost 1%, after beginning the day with gains of near 4%. The large gains came after Raymond James upgraded the stock to “Strong-Buy” from “Market Perform” due to a market shift (literally). The company operates an electronic trading platform for investment industry professionals to trade corporate bonds and fixed-income instruments. Raymond James believes that there is a shift occurring in favor of electronic trading from the corporate bond trading of old.
In a market/economy that is always changing, I understand Raymond James’ belief that institutions prefer ease of trading corporate bonds. My fear is that, although Raymond James may be correct, MarketAxess Holdings Inc. (NASDAQ:MKTX) is quite expensive. The company is seeing low double-digit topline growth with strong margins, but has a price/sales of 7.24. I consider its valuation to be high, far too high for a “Strong-Buy” rating. Therefore, I would watch for future trends in the market, but wouldn’t buy at these levels.
Three Months Too Late on this Call
Shares of Netflix, Inc. (NASDAQ:NFLX) continue to prove that regardless of market direction, that its stock has a mind of its own. This was evident as the stock gained 3.5% on Monday following an initiation of coverage by BTIG with a “Buy” rating and a $250 price target. The firm believes that the company’s content and originality will drive subscriber growth and that despite “sufficiently high” content expenses; the firm believes the stage has been set for higher revenue and profits in the years ahead.
While I understand that Netflix, Inc. (NASDAQ:NFLX) has become an Amazon-like stock where analysts ignore profits now for growth later, I do have major concerns with this coverage. First off, it is one of the more bullish price targets on the stock, and there was no new information but rather a repeat of the bull case from three months ago. In fact, this leads me to reflect on earlier upgrades from Goldman and Evercore who argued these same exact points. In my opinion, this is a classic, “follow-the-leader” analyst call, and although it may be correct, it is bad due to lacking originality for the high target.
A Great Discovery Call from three Market Setting Firms
A few days ago, a small $340 million company Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) filed its IPO, and is now receiving a number of bullish outlooks from firms JPMorgan, Lerrink Swan, and Credit Suisse. The strong outlooks are based on the company’s HCV development pipeline; a market that analysts believe could reach $20 billion by 2020. Obviously, judging by the outlooks, analysts appear to be anticipating successful trials from the company, a company with a very large pipeline.
Prior to today’s upgrade, I had never heard of this company, I simply let it slip through the cracks. But now, I am on the Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) bandwagon. The company has more than $40 million in cash, reducing the likelihood of financing, has collaborations with Novartis, and its lead product ABT-450 is being developed in multiple Phase 2 & 3 trials (with a partner). So far, in early studies, there has been nothing negative regarding ABT-450 and with protease inhibitors being a hot area of biotechnology, I consider its $340 million market cap to be cheap. As a result, great calls by the three analysts covering the stock.
Conclusion
In my book, Taking Charge With Value Investing (McGraw-Hill, 2013) I discuss how to assess the opinions of analysts, and how to use them to your advantage. Typically, there are two types of calls: those that follow the trend and those who call regardless of the trend. It is important to distinguish between these two groups, and to not follow the performance that a call creates, but rather read and incorporate the notes as part of your research. Then, when you are able to find inconsistencies between value and valuation you will be better prepared to capitalize on the opportunity.
Brian Nichols is long ENTA. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix
