Tag Archives: NASDAQ:AMGN

Are High Return Investments Too Good to be True?

Who doesn’t want high returns on their investments? However, when something sounds too good to be true, it probably is. More specifically, when certain stocks deliver excellent returns, ask yourself what’s the risk behind them.

coins stacking higher and higher with plant behind each stack indicating growth of money

Here are some examples.

High Return Tech Stocks

Shopify (TSX:SHOP)(NYSE:SHOP) has got to be one of the highest return tech stocks out there. Here’s a chart that shows its total returns since inception compared to other big tech names.

Yes, Shopify stock kicked the butts of the FANG stocks, Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG).

SHOP Chart

SHOP data by YCharts

However, Shopify’s valuation is super duper expensive. At about US$200 per share, it trades at a blended P/E of about 500 and a PEG ratio of about 20.

Compare that to:

  • Facebook’s P/E of about 23.2 and a PEG ratio of about 1.5 at US$175 per share,
  • Amazon’s P/E of about 83.6 and a PEG ratio of roughly 1.4-2.8 at US$1850 per share,
  • Netflix’s P/E of about 120 and a PEG ratio of 2.4-3.9 at US$361 per share, and
  • Alphabet’s P/E of about 27.3 and a PEG ratio of 1.5-1.9 at US$1208 per share for GOOGL.

Surely, Shopify is growing at a super fast rate. For example, revenue growth was 59% in 2018. However, because of its astronomical valuation, it’s especially subject to an especially huge drawdown when we experience a market meltdown.

By the way, I don’t categorize the little correction we had from October to December 2018 as a market meltdown. In that period, Shopify fell from a high of about US$168 to a low of about US$120 for a drop of 28%. Imagine what a real market meltdown can do to Shopify stock (at least in the short term).

Biotech Stocks

Biotech stocks did very well for a long time. The long-term price chart of iShares NASDAQ Biotechnology Index (NASDAQ:IBB) illustrates the big picture.

Source: Google Finance with author annotatio
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Amgen, Inc. Yields 3%. Is it a Buy, Hold, or Sell?

Amgen, Inc. (NASDAQ:AMGN) now yields 3% after it raised its dividend by 15% for Q1 2017. This marks the start of its sixth consecutive year dividend hike. Is the biotech company a good buy today? What kind of total returns can you expect from an investment today?

Stable growing earnings, stable growing dividend

Thanks partly to share buybacks, Amgen has generated stable earnings per share (“EPS”) growth for at least 18 years. Even after the 15% raise, Amgen’s payout ratio is expected to remain below 40%.

A group of 37 analysts believes Amgen can deliver EPS growth of 6.9-7.3% in the next 3-5 years. The high single-digit earnings growth rate and reasonable payout ratio should allow Amgen to continue its dividend growth streak.

Moreover, any share repurchases from Amgen will help solidify that earnings growth.

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What Makes a Safe Stock Investment for Your Portfolio?

A stock that pays a safe dividend must first be a safe stock investment. (Yes, businesses can perform badly for years or even go bankrupt.)

So, investors should look for quality stocks, which have strong balance sheets, strong competitive advantages against their peers, and strong histories of profitability.

Do higher profits imply more dividends for you? I mean, shareholders.

Even after you’ve found a great business, it’s up to you to buy it at the right valuation to improve the safety of the investment.

Here’s an example with Amgen, Inc. (NASDAQ:AMGN).

laboratory

Strong balance sheet

As an overview, Amgen has a high S&P credit rating of A and a reasonable debt-to-cap of 46%.

At the end of Q3 2016, Amgen had current assets of $45.84 billion which were 4.3 times greater than its current liabilities of $10.54 billion.

Moreover, its cash, cash equivalents, and marketable securities were $37.98 billion. It also had long-term debt of $30.5 billion. So, Amgen could essentially repay that debt if it wanted to.

Amgen logo

Strong competitive advantages and long-term profitability

Morningstar assigns the biotech company a wide economic moat rating, indicating it has strong long-term competitive advantages.

Its wide moat protects Amgen’s long-term profitability. The company’s quality is showcased in its long-term earnings-per-share (EPS) growth chart.

Amgen's profitability

Long-term earnings-per-share growth

Do higher profits mean more dividends?

This surely seems to be the case for Amgen. Since starting a dividend in 2011, the biotech has hiked it at a double-digit rate every year since. Its last dividend hike was 26.5%. At about $139 per share, Amgen yields almost 2.9% with a sustainable payout ratio of 35%.

Buy at the right valuation

To reduce risk and improve returns, investors should never overpay for a company — even for high-quality companies, such as Amgen.

The fair multiple varies for each industry and company. For Amgen, it’s reasonable to assign it a fair price-to-earnings ratio (P/E) of 15, which suggests a price of about $173 per share.

Amgen is discounted

Now that the biotech shares have dipped to below $139 per share (a P/E of 12.2), it’s a good time to buy it at a discount of about 20%. Morningstar suggests a fair value estimate of $194, which suggests an even larger margin of safety of 28.5%.

Conclusion

To reduce risk and improve your returns, invest in quality companies when they’re priced at the right valuation. You will be rewarded over the long term.

These companies should have strong balance sheets, strong competitive advantages against their peers, and strong histories of profitability. It’d be all the better if you choose companies which pay dividends, as dividends can only add to your overall returns with reduced volatility.

This article first appeared in my premium service, from which my subscribers get priority attention and gain access to my real-time buys and sales. Feel free to try the service for free for two weeks.

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Disclosure: At the time of writing, the author owns shares in Amgen.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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