Stock of the Week: Reading the DNA of This Pharma Play

|March 24, 2023

It’s Readers Choice time here at Stock of the Week

Reader E.L. asked for my thoughts on a big-name pharma company that’s been on quite a ride over the past couple of years.

It’s growing earnings at a huge 76% per year… and its CROCI (cash return on capital invested) is very strong at 25%.

Very nice.

But there are a few red flags investors need to be aware of.

You may be surprised by my analysis of this one…

Get all the details – including the ticker – in my latest Stock of the Week video.

Click on the image below to watch it.



Hi everyone. Welcome to Stock of the Week. Welcome to it, Manward family.

I’m Alpesh Patel, a hedge fund manager. As you know, we run a hedge fund, a private equity firm, and now we’ve just launched a venture capital firm as well. So welcome on board during what is actually a very volatile week in the markets, as you know.

This week’s Stock of the Week is a request from one of my readers. They’ve asked me to have a look at Moderna (MRNA), which I’m more than happy to do.

For those of you who don’t know Moderna – I’d be shocked if you don’t, following COVID – it’s a biotechnology company that discovers, develops and commercializes messenger RNA therapeutics and vaccines – vaccines, I understand – for the treatment of infectious diseases, obviously, immuno-oncology, rare diseases, autoimmune and cardiovascular diseases globally.

It’s a Nasdaq company. It’s been around only for the last 13 years, and it’s become profitable over the past five years, growing earnings at 76% per annum.

So a rapid, rapid growth in this company.

Well, what do the financials look like? On my proprietary Growth-Value-Income rating, it only rates at a 4.

Now, remember, this is a proprietary algorithm that I’ve created which assesses every single stock out there based on its valuation, so its share price relative to its profitability; its growth, such as revenue growth; its cash flows; and its dividend yields. And it weighs those individual factors of growth, value and income based on academic research which has been published.

This comes out a 4, which is below my minimum requirement of a 7, I’m afraid. So it wouldn’t meet it on those criteria.

However, its cash return on capital invested (CROCI) is very high. It’s at 24.8%. Now, remember, CROCI is a formula invented by Deutsche Bank Wealth Management. It’s used by Goldman Sachs Wealth Management for its wealthiest clients. And if you want to know the importance of CROCI, have a look at the links below.

But this company does meet the minimum CROCI requirements, and that’s good. It’s very good for the company.

The stock is up over the past six months, and the Sortino is good, which is a measure of reward, the average reward to the average volatility, or risk, of missing that reward. So that’s good.

Volatility, however, is 78%. That’s too high for me. And of course, that’s impacted not by the recent past but the longer-term past. And so you might say, “Well, recently it’s not been so volatile.” Nevertheless, it doesn’t quite meet our criteria.

The alpha, or the ability to outperform the market, is too low as well, I’m afraid.

So let’s look at some of these figures.

Well, in terms of quality, return on equity is strong, return on capital employed is strong and CROCI, as I mentioned, is strong.

Turnover’s been strong. Borrowing’s been rising a little bit quickly, but it’s nothing that I’m particularly worried about.

Profit fell off a little bit. Again, nothing I’m too worried about there.

Forecast growth is substantially lower on turnover. Now, it could be partly because so much growth happened during COVID and immediately after COVID that you can hardly expect it to continue on that.

Just looking at the stock price, it has pretty much been going sideways for two years now, more than two years. So from January 2021 to 2022 and 2023, it’s gone nowhere.

I can imagine that’s why the reader was a little bit concerned. Maybe they got a bit excited when it did move up before giving all its gains up again. So that’s a bit of a… well, it can be both a negative and a positive. Sometimes companies just need time before they resume their upward trend.

So if you’re holding on to it, you may well stay patient with it because it is undervalued on a discounted cash flow basis. It’s about 55% undervalued on a discounted cashflow basis. So there are reasons for staying with it in that case. And it’s, as I say, a good value.

The volatility is what’s of concern. If you look at the return histograms of this company, it tends to have a very wide range of probabilities on which it could move. And that means it could be down over 250 days as much as 75% – not likely, but potentially. That’s just a reflection of the volatility of the company.

Now, if it continues going sideways, then volatility is less of a concern because clearly, self-evidently, it is not as volatile as it was in months past.

Okay, so you might say, “I’m willing to take volatility on the chin, willing to take some of the other factors because of the discounted cash flow.”

But overall, you might wait and say, if you already hold it, you may well continue holding it. If you don’t hold it, you’re probably going to look at my other Stocks of the Week, which tend to beat it on different criteria.

Thank you very much. I hope you enjoyed that and it gave you a good flavor and insight of what my GVI Investor followers get and what my hedge fund team puts across my desk in terms of the research reports, which I then add a bit of color and insight to.

Thank you all for listening.