After hitting a five-year low I’m betting this hidden gem will rocket like the Rolls-Royce share price

Harvey Jones hopes to replicate the excitement of the Rolls-Royce share price rally by investing in what he thinks is an oversold stock from the FTSE 250.

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Like so many investors, I dream of finding the next stock that could take off like the Rolls-Royce share price (LSE: RR).

The FTSE 100-listed engineering giant’s shares have climbed a staggering 633% over two years and 140% over the last 12 months.

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Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

They continue to climb – up 6.38% in the last week – but Rolls-Royce shares now look pricey trading at more than 38 times earnings. That’s double the index average of 15.7 times.

This FTSE 100 stock has smashed the index

CEO Tufan Erginbilgic is still hungry. He’s cutting jobs, streamlining operations and multiplying margins in a bid to lift operating profits from £1.6bn in 2023 to £2.8bn by 2027.

However, I now see this more as a long-term dividend and growth play, for patient investors. And it’s not without risks.

The European Union Aviation Safety Agency is probing Rolls-Royce Trent XWB-97 engines after a “serious incident” involving a Cathay Pacific jet earlier this month. As we’ve seen with Boeing, technical problems can multiply once found. I’m sticking with my Rolls-royce shares but won’t buy more at today’s high valuation.

So where can I find my next growth spurt? After trawling the FTSE 250 for hidden gems I’m sorely tempted by biotherapeutics business Puretech Health (LSE: PRTC).

Like Rolls-Royce before the CEO took over, Puretech is in the doldrums. Its shares are down 32.32% over one year. Yesterday (24 September), they hit a five-year low of 141.8p. So what’s gone wrong?

Created with Highcharts 11.4.3PureTech Health Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

PureTech specialises in medicines related to the brain, gut, and immune system. It’s been pouring money into researching and developing treatments, and is now pushing a pipeline of 28 therapeutics through US and EU regulatory processes.

The share price may be due a massive recovery

This is a very hit-or-miss process, of course. FTSE 100 giant GSK has been struggling to with this challenge for years and it’s worth more than £60bn. Puretech has a market cap of £363m, a minnow by comparison.

It’s made a pre-tax loss in each the last three years. 2022 full-year revenues of $15.61m plunged to just $3.33m in 2023. Despite that, it ended the year with cash, cash equivalents and short-term investments totalling $326m. 

That’s only slightly less than its market cap and the board says that gives it an operational runway into “at least 2027”.

In another positive surprise, PureTech recently treated investors to a $100m share buyback, using its share of proceeds from the $14bn sale of the PureTech-founded Karuna Therapeutics to Bristol-Myers Squibb.

CEO Bharatt Chowrira has talked up the group’s track record of clinical success, which he says is “six times the industry average”. The problem is that it’s impossible to say whether the current crop is any good. Buying Puretech shares is a gamble as a result.

The three analysts have set a one-year price forecast of 478p. That’s up 214.34% from today’s 152p. Unsurprisingly, there’s a huge range, from a minimum of 337p to a maximum of 643p. Puretech is a high-risk, high-reward play. I’ll take a small punt, and hope for a Rolls-Royce-sized rally.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in GSK and Rolls-Royce Plc. The Motley Fool UK has recommended GSK and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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