Wall Street can’t ignore Corcept Therapeutics for much longer
It’s no secret for great investors that as-reported financial metrics are unreliable.
To be successful, they make adjustments to the financial statements to produce a true picture of economic reality, one that is otherwise obscured by arcane accounting principles. This allows them to find companies that exhibit three characteristics: high quality, strong growth potential, and low valuations.
Today, we highlight our QGV 50, which emulates this investment strategy to produce outsized returns in excess of the market over long periods of time.
We’ll take a look at one company in particular on this month’s QGV 50, describing how as-reported metrics distort economic reality and can lead investors to miss significant opportunities.
Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.
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Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the QGV 50, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300bps per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.
See for yourself below.
Today, we are highlighting a company that is tackling a silent contributor to some of the biggest health problems in the world.
That isn’t some external chemical or carcinogen, or something we eat… it’s stress.
We so frequently hear about the various ways in which stress can worsen existing conditions or make new conditions arise. One of the medical reasons for this is that stress causes the overproduction of cortisol, the “stress hormone.”
Harnessing the power to regulate cortisol could have significant health benefits, and that is exactly what Corcept Therapeutics (CORT) has been working on for decades.
Corcept makes treatments like Korlym and other drugs that can influence cortisol levels. Among other uses, these can treat conditions like endogenous cushing’s syndrome for those ineligible for surgery or for whom surgery has failed.
Over the past ten years, patients and doctors have come to recognize how Corcept’s drugs offer unique solutions to cortisone-related issues. Revenue has steadily grown from just $3 million to over $350 million, and as-reported metrics show that profitability is scaling with the growth of the firm.
They also show the firm generating a 16% return on assets (“ROA”). Take a look:
But even this respectable level of profitability understates just how profitable the firm really is. Uniform Accounting shows the company’s real ROA is almost three times higher, at 44% in 2020. See for yourself:
By focusing on such a significant yet unaddressed underlying issue, the firm has positioned itself to grow into a large untapped market. This is why Corcept has been able to grow its assets by over 20% annually for the past 3 years, and yet, the market doesn’t appear to recognize it.
While as-reported P/E makes it look like the company is valued around market average valuations at 22x, the reality is Corcept is priced far more attractively below 11x when using better Uniform data. This name landed on this month’s QGV screen because of its robust ROAs, growth, and cheap valuation.
Better yet, due to the fog cast by GAAP accounting standards, the company’s productivity is not overtly obvious at first glance. It may take the market some time to recognize the firm’s attractiveness, which brings the potential for massive upside in the coming years.
To see the other 49 names on the list, click here.
SUMMARY and Corcept Therapeutics Incorporated Tearsheet
As the Uniform Accounting tearsheet for Corcept Therapeutics Incorporated (CORT:USA) highlights, the Uniform P/E trades at 11.2x, which is below the global corporate average of 24.0x, but around its historical P/E of 10.2x.
Low P/Es require low EPS growth to sustain them. In the case of Corcept Therapeutics, the company has recently shown 18% Uniform EPS growth.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Corcept Therapeutics’ Wall Street analyst-driven forecast is an immaterial EPS decline in 2021 and an 8% EPS growth in 2022.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Corcept Therapeutics’ $21 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to shrink 11% annually over the next three years. What Wall Street analysts expect for Corcept Therapeutics’ earnings growth is above what the current stock market valuation requires in 2021 and 2022.
Furthermore, the company’s earning power in 2020 is 7x above the long-run corporate average. Moreover, cash flows and cash on hand are 11x its total obligations—including debt maturities and capex maintenance. All in all, this signals a low credit risk.
Lastly, Corcept Therapeutics’ Uniform earnings growth is in line with its peer averages and the company is also trading in line with its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research