While bull markets can be exciting, they typically provide much less opportunity and make stock-picking much more difficult. This is because almost everything goes up in a bull market, regardless of quality, making it more difficult to separate the wheat from the chaff.
Hence, bear markets are where the real opportunity lies to uncover future major stock market winners.
One strategy to identify these names early is by scanning for high-growth companies that aren’t sagging with the general market weakness.
Regarding growth requirements, I prefer to look for companies with a minimum of 40% sales growth year-over-year and a minimum annual revenue of $100MM.
From a technical standpoint, one way to find the strongest stocks is to look for those stocks that are in uptrends regardless of the general market weakness.
This divergence suggests that these stocks must be under accumulation by larger players to allow them to evade the relentless selling pressure that takes the wind out of most stocks in a bear market.
The stocks meeting these criteria can be thought of as beachballs being held underwater, with the market being water, and when the weight is lifted, they can often double in price or more.
While no one knows with certainty which will be the next major winner, one stock meets this criterion and is showing characteristics that make it stand out from the pack.
Growth At A Reasonable Price
Axonics (AXNX) is a $3.4BB medical device company headquartered in Irvine, CA. Its goal is to be the global leader in incontinence therapies.
Its Axonics System is a clinically proven and long-lasting solution for those suffering from overactive bladders [OAB], fecal incontinence [FI], and urinary retention.
While this may not seem like a massive market, OAB affects over 40MM adults in the United States, and FI affects over 18MM adults, representing over one-fifth of Americans.
Meanwhile, the company’s Bulkamid System treats female stress urinary incontinence [SUI], which is the unintentional passing of urine during activity or exertion (coughing, laughing, exercise). It is caused by weak pelvic floor muscles, affects women of all ages, and is estimated to affect 29MM women in the US alone.
Fortunately, Axonics has a solution with a more modern form of Sacral Neuromodulation Therapy than previous therapy options, such as the InterimStim II.
While effective, the InterStrim II’s size led to some pain and discomfort, and it had to be surgically explanted and replaced every 3-5 years due to battery depletion.
Axonics rechargeable SNM system (Axonics R15) was approved in Q4 2019, is 60% smaller and half the weight of legacy technology, lasts over 15 years and is easy to use with a patient remote control.
The results speak for themselves, with 94% patient satisfaction with therapy and a 93% therapy success rate.
In Axonics’ most recent quarter, the company reported record revenue of $69.0MM, a 50% increase year-over-year, with 81% of revenue from its SNM system and the remainder from Bulkamid [SUI therapy].
Meanwhile, the company reported a 1000 basis point increase in gross margins (72.8% vs. 62.6%) and raised its full-year sales guidance due to its phenomenal results ($253MM vs. $238MM).
However, the future of the company is the most exciting with a best-in-class product and improved marketing to raise awareness for this therapy that 93% of existing patients that have undergone therapy would repeat, according to studies.
Given the attractive study results combined with improved leads (400,000 unique website visits in Q2 alone), I would expect robust sales growth for its Axonics system.
This should help Axonics to retain its spot as one of the few mid-cap companies able to report back-to-back 35%+ sales in growth in FY2022 and FY2023, making it a hot commodity among growth funds.
At first glance, Axonics may seem expensive, sporting a market cap of $3.4BB and estimated FY2022 sales of $255MM (13.3x sales).
However, it’s important to note that Axonics will end the year with $350MM in cash ($7.00 per share) and no debt, and its annual sales are expected to nearly double to $480MM in FY2025 based on current estimates.
So, after excluding $350MM in cash and looking at Axonics on a more relevant forward-sales basis, AXNX trades at just ~7.9x FY2024 sales ($388MM), a very reasonable valuation for a high-growth stock with ~70% gross margins.
If we compare these figures to companies like Dexcom (DXCM) in its high-growth phase, it regularly traded at more than 15x two-year forward sales, nearly double AXNX’s forward multiple.
So, despite the stock’s 30% year-to-date performance, I still see Axonics as quite reasonably valued.
The Technical Picture
There are many things to like about AXNX from a technical standpoint. Not only is the stock sitting within 15% of all-time highs, which suggests that there is limited potential supply overhead, but the stock is above rising 100-day and 200-day moving averages and in a clear uptrend.
In addition, while the S&P-500 made lower lows in October, AXNX made a significantly higher low, and it is outperforming 95% of US stocks from a relative strength standpoint, suggesting it’s under accumulation.
This doesn’t preclude a pullback in the stock, but I would be surprised to see the stock fall back below $65.00 per share with strong demand in this area, even if we see market weakness.
If we see further market strength and a Santa Rally for the S&P-500, I would not be surprised to see AXNX re-test its highs near $81.00 per share.
Finally, the stock is building a massive cup and handle base. If it breaks above $81.00 from a monthly closing standpoint, this will target a move above $105.00 per share.
The Bottom Line
Based on what I believe to be a fair multiple of 11.5x two-year sales ($388MM), given AXNX’s growth trajectory and position as the leader in a massive market, I see a fair value for the stock of $4.46BB or $91.00 per share.
After adding in net cash of $350MM or $7.00 per share translates to a fair value of $98.00 to its 18-month target price, translating to a 34% upside from current levels.
While this may not seem like much upside, growth stocks tend to be difficult to model, often beat estimates, and can easily trade at 12-15x sales in their high-growth phase.
So, while I see a 34% upside in a base-case scenario, I would not be surprised to see AXNX trade above $110.00 per share.
Given this attractive upside and impressive relative strength, I would view any weakness in the stock as a buying opportunity.
The above analysis of Axonics (AXNX) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.