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There’s a strong possibility that the bear market isn’t ending in 2023, especially if a recession ends up taking hold. While that’s not great news for investors, it could mean that some growth stocks that are still a bit expensive may become more attractive buys in the near future. Both Seagen (SGEN -0.69%) and Alphabet (GOOG 0.13%) are two such stocks that investors should keep a close eye on.
Biotech specialist Seagen is a top business that you can invest in for the long haul. The company’s cancer-fighting drugs offer investors lots of solid long-term growth potential. Plus, it generates a strong gross margin of around 80%.
And while the stock has fallen 22% this year, shares of Seagen are trading at 12 times revenue, which is a bit steep given that the company isn’t profitable yet. That is getting close to its five-year low, but given the uncertainty with COVID-19 cases climbing again and the potential for procedures to be put off next year, investors should price in a margin of safety, and thus, wait for a lower valuation before adding Seagen to their portfolios.
SGEN PS Ratio data by YCharts
The business has been doing well this year, with Seagen reporting net product sales of $428 million for the quarter ended Sept. 30, a 17% increase from the prior-year period. And on a year-to-date basis, its growth rate is even higher at 22%. This is even as cervical cancer drug Tivdak is still only beginning to generate revenue (the Food and Drug Administration granted an accelerated approval for the drug last September). Tivdak could bring in over $1 billion in revenue at its peak; in the past three months, its sales were just $16 million.
And there should be even more growth on the way for Seagen because it also has ongoing trials for its other approved drugs to expand their uses, including top-selling Hodgkin lymphoma medication Adcetris. With multiple drugs in its portfolio to build around, Seagen is in a great position to continue growing its top line.
Seagen is a top growth stock to own, and at more of a discount — perhaps to below 10 times revenue — it could be too good of a buy to pass up.
Tech giant Alphabet has a great business between its video-sharing platform YouTube, mobile Android devices, and its world-renowned Google search engine. It gives advertisers plenty of ways to reach consumers. The only problem is that advertisers are holding off on spending right now because concerns of a recession next year are making companies think twice about their budgets.
As a result, Alphabet’s growth rate has been declining, and there’s the looming question of whether it will be the latest tech company to announce layoffs.
GOOG Revenue (Quarterly YoY Growth) data by YCharts
Given the assets that Alphabet owns, it’s hard not to like this stock in the long term. Once the economy bounces back (along with advertising spending), this will likely be one of the fastest stocks to rally again. But the big caveat is that no one knows when that might happen.
The only reason I wouldn’t buy shares of Alphabet right now is because the worst may not be here yet for the economy — and by extension, the business. And while Alphabet’s stock is trading at what looks to be an attractive forward price-to-earnings multiple of only 18 (matching the S&P 500 average), that’s also based on analyst expectations that the company’s earnings will rise next year. Those estimates need to come down — as does Alphabet’s valuation before it’s worth buying.
At its current valuation, Alphabet’s stock is trading around the levels it was at in January 2021, when tech stocks were taking off and on their way to becoming egregiously overvalued. Despite shares falling 33% this year, Alphabet isn’t a cheap enough buy given the uncertainty ahead.
If the bear market continues next year and Alphabet’s stock falls to where it’s closer to its 2020 lows, then it may be worth buying it at that time.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), and Seagen Inc. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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