The Smartest People on Wall Street Are Buying These 3 Stocks. Should You Follow? – Motley Fool

Following the moves of famously successful investors isn’t a guaranteed path to market-crushing returns, but keeping up with what the top financial minds are thinking can provide new information and investment ideas that you might not otherwise come across. 

iRhythm Technologies  (NASDAQ:IRTC), Rhythm Pharmaceuticals (NASDAQ:RYTM), and Southwest Airlines (NYSE:LUV) are among the stocks that Wall Street’s brightest have been buying up lately. Three of our Motley Fool contributors weigh in on whether you should follow suit. 

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An under-the-radar digital health leader

Maxx Chatsko (iRhythm Technologies): It sells only two products. It has been a publicly listed company only since late 2016. But iRhythm Technologies has absolutely crushed its niche in the emerging field of digital health — and rewarded shareholders with gains of 261% since its IPO.

The company sells next-generation wireless sensors to monitor an individual’s irregular heart rhythms and send the data to an easy-to-navigate smartphone app for review. The platform is a major improvement from bulky Holter monitors, event recorders, and other heart monitor devices that look more like beepers from the 1990s and have user experiences to match. The niche has proved valuable, and J.P. Morgan analyst Robbie Marcus recently acknowledged the impressive growth by raising his price target to $100 per share. Does that mean individual investors should consider this digital health stock a buy? 

On one hand, the stock is trading at a healthy premium. iRhythm Technologies is currently valued at $2.25 billion. That prices a lot of future growth into the current share price. The stock currently trades hands at nearly 19 times sales and 33 times book value. The business isn’t profitable. 

On the other hand, iRhythm Technologies is putting up some impressive growth metrics. In the second quarter of 2018, the business delivered $35.5 million in revenue, marking 49% growth over the year-ago period and 16% growth from just the first quarter of 2018. Gross margin exceeded 73% during the most recent period. 

Management expects the solid performance to continue for the foreseeable future. Full-year 2018 guidance calls for around $140 million in revenue and gross margin of 73.5%. While that won’t be enough to enable profitable operations, investors have been more interested in the incredible growth anyway. That said, there seems to be another factor contributing to the company’s premium valuation: expectations that it may be acquired by a tech giant looking to get into healthcare. Investors shouldn’t speculate on an acquisition and may be turned off by the really expensive valuation metrics, but those with higher risk tolerance may want to take a closer look.

Billionaires are loading up on this rare-disease play

George Budwell (Rhythm Pharmaceuticals): Baker Bros. Advisors, the brainchild of Felix and Julian Baker, has a proven track record of picking top-performing biotech stocks. As such, the hedge fund’s $84.6 million stake in rare-disease specialist Rhythm Pharmaceuticals is worth a deeper look if you’re on the prowl for above-average growth opportunities. 

The lowdown is that Rhythm is developing its lead compound, setmelanotide, as a potential treatment for a host of inherited disorders of obesity, such as POMC deficiency obesity, LepR deficiency obesity, and Bardet-Biedl syndrome.

On the plus side, the Food and Drug Administration has already granted breakthrough therapy designation status for setmelanotide for both POMC and LepR deficient obesity. This highly coveted regulatory pathway is intended to accelerate the clinical development and review process for drugs with the demonstrated potential to substantially improve the standard of care for serious conditions. With this key regulatory designation in hand, Rhythm hopes to transform into a revenue-generating biotech as soon as 2020. 

While estimates vary, Wall Street is forecasting setmelanotide’s peak sales to range from a low of $750 million to a high of $1 billion by 2032.  If that range holds true, Rhythm’s shares will turn out to be a downright bargain at these levels. The company’s current market cap, after all, is only $1 billion.  

Is this rare-disease specialist a strong buy? Although numerous clinical hurdles remain, Rhythm seems to have an exceptionally strong chance of actually bringing setmelanotide to market. As a result, risk-tolerant investors may want to take a page out of the Baker Bros. playbook by buying some shares of this promising pre-revenue biotech soon. 

Buffett loves Southwest Airlines

Keith Noonan (Southwest Airlines): Warren Buffett and Berkshire Hathaway have been snatching up airline stocks, and Southwest seems to be the favorite. The Oracle of Omaha boosted his company’s stake in Southwest by 20% last quarter to reach roughly 57 million shares — worth about $3.5 billion at today’s prices. In fact, Buffett likes Southwest so much that many analysts believe the airline is an acquisition target for Berkshire. Despite the famous investor’s previous aversion to the airline industry, it’s not too hard to see why.

The airline has a strong balance sheet, a highly regarded company culture, and plenty of room for long-term growth as it increases fares and adds new destinations. The company is expanding its service within the U.S., with plans to start selling tickets to Hawaii later this year, and also has lots of expansion opportunity overseas.

As Motley Fool contributor Adam Levine-Weinberg has pointed out, Southwest currently flies to just 14 international locations, but management has indicated that the airline could add somewhere in the neighborhood of 50 new international destinations in the future. With millennials showing high affinity for travel and contributing to a general shift away from spending on ownership in favor of spending on experiences, there looks to be a favorable long-term demographic tailwind for the airline industry.

Southwest also offers a fast-growing dividend. Shares yield roughly 1% at current prices, but the company has quadrupled its payout over the past five years, and its current payout ratio comes in at just 15% of trailing earnings and 36% of trailing free cash, so the company still has plenty of room to continue delivering rapid dividend growth. 

With plenty of room for long-term earnings growth and a fast-growing dividend, Southwest is a worthwhile buy trading at roughly 15 times this year’s expected earnings.

George Budwell has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.