Key Points
When a stock hits a 52-week high, that’s a great sign the business is doing well. And when it hits a new all-time high, then you know the market is really excited about what’s ahead for the business. But at the same time, there can also be concerns that its valuation is getting too steep, and that there may be plenty of downside risk.
Vertex Pharmaceuticals (NASDAQ: VRTX) is a top healthcare company and a leader in cystic fibrosis treatments. Its stock has been doing exceptionally well this year, with gains of around 17%, far above the S&P 500‘s returns of about 10% thus far. And amid the rise in value, the stock has hit a new all-time high. Is it too late to buy shares of Vertex, or could there still be more gains ahead?
Investors are hopeful for much more growth ahead for Vertex
In its most recent earnings results, Vertex’s numbers didn’t look all that impressive; the pharma company’s sales were up just 8%, totaling roughly $3 billion for the period ending March 31. And its growth rate has been declining in recent years.
But the hope for investors is that in the long run, there may be much more growth to come, with gene therapy Casgevy still in its early rollout. Non-opioid pain medication Journavx was also approved just over a year ago, and thus, Vertex still has some levers to pull on to drive its growth rate higher in the future. Plus, it has many ongoing trials that could unlock many more opportunities in the future.
Is Vertex’s stock still worth buying right now?
Vertex is currently trading at around 31 times its trailing earnings, which is far higher than the S&P 500 average of 25. Even based on the company’s expected future earnings, the stock may be a bit expensive as its price-to-earnings-growth (PEG) multiple is around 2.0, which factors in the growth that analysts expect from the business over the next five years. When a stock’s PEG is around 1.0 or lower, it’s considered a good buy, but with Vertex being well above that, this may be a sign that there may be too much future growth already priced into the stock’s value right now. It may rise higher, but it may also be approaching a peak.
Although Vertex’s business looks promising and it has plenty of growth potential, it’s not a stock I’d buy today because of its high valuation, as that can drastically impact future returns. There are better and more reasonably priced growth stocks to choose from today.
Should you buy stock in Vertex Pharmaceuticals right now?
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.
