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Wall Street Sees Massive Upside In These 3 Little-Known Stocks

Thursday, July 17, 2014 2:30 PM

Looking at a stock in the context of an analyst's price target can be a tricky endeavor.

Most analysts place such targets in the context of where they believe shares will trade in a quarter or two. And that's not really how you should look at a stock.

The focus on near-term quarterly results can be too short-sighted. The most profitable style of investing is to focus on stocks that possess considerable upside (or downside) a year or two down the road.

Still, I monitor analysts' price targets anyway, often in search of a big gap between the current price and the target. Anytime you see an analyst suggest a stock is worth 50% or even 100% more than the current share price, it's surely worth further research.

Here are three such stocks that could surge far higher -- if analysts are on the mark with their predictions.

1. ZS Pharma (Nasdaq: ZSPH)​

When it comes to pulling off an IPO, timing is everything.

A broad range of young biotech companies came public early this year, only to get wiped out in a late winter rout. Many of the biotech stocks that swooned back then are only now regaining their footing, though in a sign of improving sentiment toward the sector, more recent biotech IPOs are getting a better reception.

Case in point: ZS Pharma, which came public at $18 a share a month ago and is already trading near $30. Remarkably, this stock still has another 65% upside, according to Credit Suisse's Vamil Divan.

ZS Pharma has developed a novel drug platform: molecular formulations that serve to trap bad electrolytes with ions, while allowing other helpful electrolytes to flow freely. Its lead drug, ZS-9, is in Phase III trials for the treatment of hyperkalemia, which is a dangerous blood condition involving elevated levels of potassium. Too much potassium can mess with the electrical energy of the heart.

Credit Suisse's Divan thinks the company has a well-regarded management team and lauds the company for the fact that it still controls 100% of its "ion trap" technology. Many other clinical stage biotech firms sell off marketing rights to their drugs long before they reach late-stage trials. Divan thinks ZS Pharma will provide clinical updates in coming months (always a solid catalyst) and thinks that ZS-9 may get FDA approval within the next 12 months.

If all goes according to plan, the analyst sees shares rising from a recent $29 to $51.​

2. Rally Software (Nasdaq: RALY)​

Over the past year, shares of this software developer have slid from $25 to $10, though JMP Securities' Patrick Walraven suggests that shares will rally right back to that 52-week high.

This developer of lifecycle management software (which helps companies integrate new and updated software modules into their networks) has ticked off investors by lowering guidance for three of the past four quarters. The fact that Rally has never turned a profit is another black mark.

Yet Walraven argues that shares are now oversold, trading at just 1.4 times projected 2014 sales. (Most software firms trade for 3 to 6 times sales, due to their extremely high gross margins.) And Walraven sees catalysts ahead. He notes that Discovery Equity Partners has taken a 5.6% stake in Rally. According to that firm's website: "Discovery Group identifies small public companies with strong operating fundamentals and invests in those that are likely to experience significant improvement in valuation based on specific anticipated business developments." JMP's Walraven thinks such catalysts exist.

"We believe the company is experiencing good pipeline build and business activity from its user conference and the introduction of two new products," he writes. He thinks that will translate into 15% to 20% top-line growth for Rally in fiscal 2015 and 2016, and suggests that shares will eventually garner a 4.8 times enterprise value/sales multiple, leading to his $25 price target.

Insiders share that enthusiasm. In mid-June, three directors acquired a collective $780,000 in Rally's stock, at around $9 a share.​

3. Array BioPharma (Nasdaq: ARRY)​

Pivoting back to the theme of busted biotechs, this developer of cancer drugs which treat small cell tumors, surely qualifies. It has drifted ever lower in recent quarters in the absence of any solid catalysts. Every time it tries to pop back above its 75-day moving average, it falters anew.

Cantor Fitzgerald's Mara Goldstein thinks this stock simply needs catalysts, and she's spotted one coming from a business rival. Roche Holdings (Nasdaq: RHHBY) recently announced positive Phase III data for a key drug combo (which combine an MEK inhibitor that impedes the flow of rogue enzymes that can cause cancer, and a BRAF inhibitor which targets a rogue protein).
Notably, Array Biopharma has generated solid Phase III data for its own MEK inhibitor, which is being tested in tandem with a BRAF inhibitor provided by Novartis (NYSE: NVS). Array isn't a one-trick pony: It has 15 other drugs in earlier stages of its clinical pipeline.

Still, Cantor's Goldstein thinks the Array/Novartis joint drug development is the key near-term catalyst, and as long as ongoing test data remain solid, shares should work their way toward her $9 price target, which is more than double current levels.

Risks to Consider: All three of these companies are currently unprofitable, and such stocks tend to sell off sharply if the market heads south and investors gravitate to safer business models.

Action to Take --> A key reason that these stocks possess such robust upside is that they are not well known. Indeed, it's quite hard to find stocks with massive upside if they are already being closely scrutinized by dozens of analysts and investment funds.

If you're excited about little-known stocks with big potential, wait until you see what StreetAuthority's Andy Obermueller has been working on. Andy has identified five "game-changing" trends with the potential to revolutionize the way we live our lives -- and make early investors a killing. To learn more about these developing technologies -- and the companies behind them -- follow this link.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.