This year's artificial intelligence (AI) boom has benefited many industries, but particularly the technology sector. While tech stocks are riding the AI wave, some overlooked, undervalued stocks in other sectors also have the potential to grow exponentially in the long run.
Here, we'll look at two such growth stocks that, in my opinion, have yet to reach their full potential. My first pick is Xencor (XNCR), a clinical-stage biotech company that is working diligently to beat life-threatening diseases. Investing in biotech companies has its perks, as healthcare products constantly remain in demand, regardless of the state of the economy.
My second choice is multi-state cannabis operator Trulieve Cannabis (TCNNF). Cannabis stocks have had a bumpy ride, going from a high in 2021 to a low now. However, a TD Cowen analyst believes “legalization of cannabis is inevitable,” though it may take a few years. This implies that cannabis companies with strong fundamentals, such as Trulieve Cannabis, would be good buy-and-hold stocks for long-term investors.
So far in 2023, Xencor shares have fallen 22%, while Trulieve’s shares have dipped 24%, underperforming the S&P 500 Index’s ($SPX) gain of 19%. Nevertheless, Wall Street believes that these two growth stocks have 90% to 100% potential upside by the end of 2024.
The Case For Xencor
The California-based clinical-stage biotech company Xencor has made significant strides in the development of novel antibody therapeutics to treat hard-to-treat life-threatening health conditions. With its innovative XmAb technology platform, Xencor has emerged as a key player in the biotech industry.
Its cutting-edge XmAb platform enables the modification of antibodies to improve their stability, potency, and half-life, thereby improving their efficacy in treating a wide range of diseases.
Xencor’s total revenue in Q3 jumped 117% year-over-year to $59.2 million, surpassing analysts' estimates by $29.1 million. The net loss of $0.40 per share beat the consensus estimate by $0.31.
The company continues to heavily invest in research and development to strengthen its product pipeline, with those expenses totaling $65 million in Q3. Plus, Xencor’s strategic partnerships with bigger biotech firms like Amgen (AMGN), Janssen Biotech, Gilead Sciences (GILD), and Omeros Corporation (OMER) to develop antibodies may help the company turn a profit soon.
Furthermore, Xencor's sale of Ultomiris and Monjuvi OMERS Life Sciences royalty interests resulted in a cash inflow of $215 million to its balance sheet. Xencor was also wise to halt the development of the XmAb104 bispecific antibody based on efficacy data and redirect resources to more important projects.
The company had a cash balance of $541.4 million at the end of the quarter. According to management, the "cash runway now extends into 2027."
Xencor's engineered antibodies hold enormous promise in the treatment of various cancers, autoimmune disorders, and infectious diseases, increasing the likelihood of more strategic partnerships, thus adding to the company's revenue in the future. Analysts expect Xencor’s full-year 2023 revenue to increase by 18.6% to $195 million.
Overall, Wall Street remains bullish about Xencor's long-term prospects, rating it a "strong buy.” Of the 12 analysts covering XNCR, 10 have a “strong buy” recommendation, one has a “moderate buy” rating and one suggests a “strong sell.”
The analysts’ average price target of $39.67 represents a potential upside of about 97% from current levels.
The Case For Trulieve Cannabis
Investors' interest in cannabis stocks may have waned as a result of the lack of progress toward federal legalization. The industry as a whole, on the other hand, is experiencing explosive growth. According to Statista, the global cannabis market could grow at a compound annual growth rate of 15% to be worth $102.9 billion by 2028. This may be part of the reason why Wall Street is so bullish on multi-state operators like Trulieve Cannabis.
Founded in 2016, Trulieve swiftly transitioned itself from a small medical cannabis retailer in Florida to a leader in the U.S. cannabis industry. Initially, the company only focused on its home state of Florida, where it has established a dominant position with around 130 stores.
Trulieve has now spread its roots to other states, with 190 stores nationwide offering the best range of medical and recreational cannabis. Furthermore, Trulieve's acquisition of peer cannabis company Harvest Health in 2021 gave it a stronghold in the cannabis markets of the northeast, southeast, and southwest.
Due to the oversaturation of the American cannabis market, Trulieve's total revenue fell 7% to $275 million in the third quarter. While Trulieve isn’t profitable yet, it has managed to be profitable from an operational standpoint in the last few years, thanks to its focus on not going on an expansion spree. Its adjusted EBITDA in the quarter came in at $78 million, compared to $100 million in the year-ago period.
Trulieve ended the quarter with around $200 million in cash and cash equivalents. It also generated a free cash flow of $87 million. Trulieve’s debt-to-equity ratio stands at 0.62. A higher ratio could imply a company’s heavy reliance on debt to carry out its operations.
Overall, Wall Street rates Trulieve Cannabis stock as a “buy” with an average target price of $11.22. Valued at a market cap of $1.1 billion, analysts foresee Trulieve stock rising by 89% in the next 12 months.
Analysts predict an increase of 0.29% in total revenue to $1.12 billion in 2024. Trading at 1 times forward 2024 projected sales, Trulieve is ridiculously cheap for a growth stock in a lucrative industry that has high-growth potential.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
