Occasionally good stocks decline even when business is growing strongly. It’s the weirdest thing and also it is always a buying opportunity, suggests Jon Markman, growth stock specialist and editor of Strategic Advantage.
Veeva Systems (VEEV) is a digital transformation leader; it's a great business with a terrific executive team, great products and strong competitive advantages that should rebound from its recent pullback.
Veeva operates in three segments: helping large pharmaceutical companies with filings to comply with government regulations; capturing clinical trial data; and performing as a customer relationship management tool for sales professionals.
The entire healthcare sector is undergoing its own digital transformation. Many parts of healthcare still use paper for regulatory filings. Veeva’s cloud-based software eradicates paper. It’s an instant productivity boost and it’s leading to heady sales growth.
The Pleasanton, Calif.-based company reported spectacular second quarter financial results September 1, beating on both the top and bottom lines. Executives even raised guidance for Q3. And shares tumbled 7%.
There was no reason for this, apart from technical selling.
A report from Investor’s Business Daily noted that shares were toying with its No.1 sell rule for so-called momentum traders. This is the idea, according to IBD, that a share price should never retreat more than 7%-8% below a technical buy point. Veeva shares are now well below that point.
The restlessness of short term momentum traders is a dumb reason to sell shares. Every time shares have corrected by 15% or more since 2016, a move to substantial new highs occurred on average five months later.
Long-term investors will forget the IBD technical mumbo jumbo and buy shares. Let me reiterate: Business at Veeva is not good, it’s great. Sales during Q2 grew to $456 million, up 29% from a year ago. Earnings per share surged to 94 cents, up 31% and 7 cents clear of the FactSet analyst consensus expectation.
The company is even making good progress moving more of its business to longer-term subscriptions. That revenue stream accounted for $366 million in Q2. This steady source of cash usually leads to higher share price valuation because the executive team has better earnings visibility.
I am not adding this classic digital transformation play to our buy list at this time, but wanted you to know about the opportunity.