Wall Street Has Given Up on These 3 Stocks, and That’s a Huge Mistake

Too often the market will throw out the baby with the bathwater when it gets down on a company, and that’s a mistake. But it’s also an opportunity for investors looking for stocks that have the potential to grow into mighty investments…

That’s the case with Rhythm Pharmaceuticals (NASDAQ:RYTM)Baidu(NASDAQ:BIDU), and Vista Outdoor (NYSE:VSTO), all companies that have been cast aside by the market. But these three Motley Fool contributors believe that despite their beaten-down status, these companies still have plenty of opportunity to turn around and grow. Read below to see why these are stocks worth catching despite the market abandoning them.

A promising clinical-stage biotech

George Budwell (Rhythm Pharmaceuticals): Shares of the rare-disease drugmaker Rhythm Pharmaceuticals have lost a staggering 40% of their value over the past 12 months. This double-digit sell-off, though, could turn out to be an outstanding entry point for risk-tolerant investors.

The backstory is that Rhythm’s lead product candidate, setmelanotide, is being developed as a potential treatment for a basket of genetically based obesity disorders, including POMC deficiency obesity, LepR deficiency obesity, and Bardet-Biedl syndrome. The company is set to unveil the drug’s first late-stage data in both POMC deficiency obesity and LepR deficiency obesity this quarter, which is expected to form the basis for a regulatory filing with the Food and Drug Administration in late 2019 or early 2020.

The big deal is that setmelanotide is forecast to generate no less than $750 million in annual sales if approved across all of its intended indications. That’s a nice chunk of change for a company currently sporting a sub-$700 million market cap.

So why is the market betting against Rhythm? Two reasons. First, the drugmaker has been burning through cash at an alarming rate in recent quarters, thanks to setmelanotide’s broad clinical program. Rhythm, in kind, may have to tap the public markets in the not-so-distant future to raise the capital necessary to field a sales team (assuming setmelanotide gets this far in its life cycle). Next up, setmelanotide’s commercial ramp-up is predicted to be painfully slow due to the difficulties associated with identifying patients with these particular obesity disorders. The bulk of the drug’s sales, in fact, are expected to occur in the back half of the 2020s.

Bottom line: Given the clinical, regulatory, and commercial hurdles facing Rhythm, it’s easy to see why investors have lost patience. However, this clinical-stage biotech stock could quickly snap back into shape if setmelanotide hits the mark in its late-stage program later this year.

Baidu could bounce back big time

Keith Noonan (Baidu): Ongoing trade disputes with the U.S. have contributed to slowing economic growth in China and made companies more cautious with their advertising spending budgets. This dynamic, combined with Chinese regulators’ increasingly strict internet content standards and rising technology costs, has resulted in big slashes to Baidu’s sales and earnings forecasts and crushed the company’s share price. The stock trades down more than 50% from its share price a year ago and roughly 62% from its lifetime high.

The company is still the far-and-away leader in China’s search market, with around 70% market share, and it also looks positioned to be one of the country’s top players in self-driving cars and artificial intelligence. In addition to its core search and AI initiatives, Baidu’s roughly $9 billion net cash position and its majority stake in streaming video leader iQiyi and substantial stake in online tourism company Ctrip suggest the company is on sound financial footing.

Given no concrete indications that the trade situation will be resolved and business-specific issues that still need to be addressed, Baidu shareholders will have to accept that there could be more bumps in the road and volatility ahead. On the other hand, the long-term growth outlook for the Chinese internet market remains very encouraging, and patient investors could see great returns from the stock if stabilizing trade relations help rejuvenate its search business, AI initiatives bear fruit, and other bets pay off…

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