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How This Former Market Darling Became an Undervalued Stock

Sometimes a company undergoes a metamorphosis—like tadpole to frog, or caterpillar to butterfly—and it takes the stock market a while to understand that it’s dealing with a new entity.

Undervalued—Until the Stock Market Catches On

Sometimes a company undergoes a metamorphosis—like tadpole to frog, or caterpillar to butterfly—and it takes the stock market a while to understand that it’s dealing with a new entity.

During the early part of this process, a stock can become incredibly undervalued—until investors catch on that the current company is new and better than the old, familiar company. That’s when an undervalued stock can quickly become a fast-rising growth stock.

Today I’d like to present a company that’s transitioning from a decade of chronic net losses to solid profitability—and whose earnings growth rate is expected to surge ahead of its competitors through the year 2020.

Vertex Pharmaceuticals (VRTX) is a biotech company that develops breakthrough drugs and carries them through to the manufacturing process. Vertex is a clear leader in the treatment of cystic fibrosis (CF). Its CF therapies can potentially treat about half of the world’s CF patients, which could generate billions of dollars in sales.

Vertex is currently negotiating with the National Institute for Health and Care Excellence (NICE) on pricing of cystic fibrosis treatment Orkambi in the U.K. The stock has been volatile in relation to news on the Orkambi pricing issue, despite Vertex management’s expressed confidence that they can achieve a resolution.

But the stock market has yet to embrace that potential outcome. VRTX remains an extremely undervalued stock.

The company also develops treatments for anti-inflammatory conditions, cancer and other serious diseases, with at least six drug candidates in its pipeline. A phase III cystic fibrosis treatment is due for completion in July 2017.

Earnings Growth of 207%!

After only one barely-profitable year between 2006 and 2015, Vertex is expected to earn $1.11 per share in 2016, $3.41 per share in 2017 (December year-end) reflecting 207% earnings growth in 2017, and surpass $11.00 per share by the year 2020.

That puts Vertex on target for much stronger earnings growth through 2020 than most other big names in the biotech sector, including Alexion (ALXN), Amgen (AMGN), Biogen (BIIB), Celgene (CELG), and Gilead (GILD).

Now that Vertex is turning a profit, it will qualify as a candidate for a myriad of institutional growth stock portfolios that screen for annual net income. That means lots of potential stock-buying activity, which will push the share price upwards.

Most investors will immediately recognize, as I did, that 207% earnings growth, coupled with an extremely low 2017 P/E of 25.4, flags VRTX as a wildly undervalued stock in the midst of an aggressive growth period.

It’s no wonder that institutional investors own 98% of this large-cap stock. VRTX appears to be a slam-dunk capital gain opportunity. (The stock does not pay a dividend.)

Vertex has a 42% long-term debt-to-capitalization ratio—a perfectly acceptable number.

And the news only gets better! Let’s look at the stock’s two-year and five-month charts.

Now is a Great Time to Buy Vertex Pharmaceuticals (VRTX)

VRTX reached its all-time high closing price at 141.48 in August 2015. The stock then lost over 40% in value as the market corrected in September and in January, and then proceeded to trade sideways February through May. Finally, VRTX broke out of its trading range at the end of May, but it was a false breakout. The share price came back down with the market downturn in June.

This appears to be a temporary pullback for this great, undervalued stock with tremendous growth potential—and history. This is a great time to buy VRTX!

Traders can jump out as VRTX approaches medium-term upside resistance at 110. Everyone else should hold their shares for future capital gains. BUY.

To receive further updates on VRTX and additional investing advice, consider trying our new advisory, Cabot Undervalued Stocks Advisor.

For details, click here.

Crista Huff is the lead analyst of Cabot Undervalued Stocks Advisor, where she combines a strict fundamental methodology with technical analysis, to identify growth and value stocks whose charts are turning bullish.