One of the most important aspects of investing is seeking out companies with clear catalysts for share price growth. Certainly, buying a slice of a stock that has an excellent track record and which is expected to continue to do so can produce decent returns, however the market is often looking for a reason to increase its rating on a stock and push its valuation higher.
A prime example of a positive catalyst is moving from being a loss-making company to a profitable entity. This can have a very strong impact on investor sentiment in a stock, since it can help to justify not only the valuation placed on a business with potential, but also confirm that it is a viable entity that can offer sustainable returns over the long run.
One such company is pharmaceutical stock, Vectura (LSE: VEC). It focuses on the development of drugs to treat airways diseases and, while it has been loss-making for the last five years on a pretax basis, it is forecast to deliver a black bottom line in each of the next two years. This is extremely encouraging for the business and, furthermore, Vectura is expected to more than double its earnings next year.
Clearly, some of this improved sentiment has already been priced in, with Vectura’s share price rising by 40% since the turn of the year. However, there appears to be scope for further significant share price rises, with Vectura trading on a price to earnings growth (PEG) ratio of just 0.3, which indicates growth is on offer at a very reasonable price.
Of course, Vectura’s larger sector peer, AstraZeneca (LSE: AZN) (NYSE: AZN.US), remains a profitable business and, despite experiencing a patent cliff, has remained so throughout the last few years. However, it could see its share price climb moving forward, with a positive catalyst being bottom line growth that is expected to occur from 2017 onwards.
Certainly, AstraZeneca is due to see its earnings rise this year, but this is set to be followed by a disappointing 2016. However, from 2017 onwards the company is targeting a sustained period of growth that should help to push its price to earnings (P/E) ratio upwards from its presently appealing level of 15.1.
As such, a combination of Vectura and AstraZeneca could be a worthy addition to Foolish portfolios. Not only do they have clear catalysts that could improve investor sentiment over the medium to long term, they both offer excellent value for money at the present time. And, with AstraZeneca having excellent cash flow and a very sound balance sheet, as well as a track record of profitability, it could provide a degree of stability and reliability should Vectura’s guidance suffer from a downgrade in the short to medium term.
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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.