An Emerging Growth Stock on Sale

Following is a sampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.

To get a  complete tally of stocks that have recently jumped to 5 stars--as well as our  full list of 5-star stocks--including our consider buying and selling prices, risk ratings, and moat ratings--simply take Morningstar Premium Membership for a test spin. Click here to sign up for a free trial.

Abraxis BioScience
Moat: Narrow  |  Risk: Above Avg  |  Price/Fair Value Ratio: 0.64*  |  Trailing 1-Year Return: -8.8%

What It Does:  Abraxis  develops, manufactures, and markets generic injectable drugs within the critical-care, anti-infective, and oncology categories. Abraxis owns global rights to cancer treatment Abraxane, which it launched in February 2005. The company acquired U.S. rights to  AstraZeneca's (AZN) branded injectable painkillers in 2006.

What Gives It an Edge: In Morningstar analyst Brian Laegeler's view, Abraxis derives its narrow economic moat from Abraxane, its best-in-class cancer therapy, as well as a profitable line of hard-to-make, generic injectable drugs. Abraxane contains a form of paclitaxel, a popular chemotherapy drug. Earlier products containing paclitaxel use a toxic solvent, but Abraxane delivers the same active ingredient minus the poison, which creates numerous clinical benefits. It also boasts a safer side-effect profile, which enables higher dosing and faster tumor response rates. In addition, Abraxis sells copycat versions of off-patent medications to hospitals and physician clinics. Its focus on hard-to-make injectable drugs limits price competition in an increasingly competitive industry. A broad injectables portfolio attracts customers interested in one-stop shopping, which has allowed Abraxis to maintain a top-three market position for more than 90% of its products. 

What the Risks Are: Laegeler believes that Abraxis courts above-average business risk. As an important contributor to overall growth and earnings, Abraxane sales significantly influence our fair value estimate; any negative news related to Abraxane's anticipated performance could lead to a substantial decline in price. This includes the possibility that Abraxane's patent could be ruled invalid by ongoing litigation. Although the company's manufacturing hiccups appear to be improving, we account for a degree of manufacturing risk in our discount rate.

What the Market Is Missing: In Laegeler's opinion, the stock remains hungover from last year's highly dilutive acquisition of American Bioscience. However, the market may underappreciate future discoveries on the branded side of the business. Laegeler believes prospective investors should proceed with caution, as the controlling shareholder has a reputation for self-dealing.

Nighthawk Radiology Holdings
Moat: Narrow  |  Risk: Avg  |  Price/Fair Value Ratio: 0.76*  |  Trailing 1-Year Return: -7.7%

What It Does:  NightHawk  provides radiology interpretation services to health-care providers during off-peak hours. The company maintains operations in Sydney, Australia, and Zurich, Switzerland, where its contracted radiologists provide reads during their regular business hours. NightHawk's direct clients include more than 370 radiology groups and more than 90 hospitals, covering 18% of all U.S. hospitals.

What Gives It an Edge: NightHawk is a heavyweight in the nighttime teleradiology industry. While most players consist of a handful of radiologists operating solely within a region or state, NightHawk's 100-plus radiologists and expansive client base (more than 20% coverage of all U.S. hospitals) facilitates a large volume of daily radiology interpretations and makes better use of each radiologist's time, an important factor considering the shortage of U.S. radiologists. NightHawk intends to gain greater scale by acquiring smaller U.S.-based competitors, which will also serve to increase its exposure to the budding daytime teleradiology market. All told, Morningstar analyst Karen Yiu believes that Nighthawk has carved out an entrenched position within an attractive health-care niche, explaining the firm's narrow economic moat rating.

What the Risks Are: Yiu rates NightHawk's business risk as average, given the noncyclical nature of the radiology industry and the firm's established contracts with its clients and radiologists. The company has no exposure to Medicare and Medicaid reimbursement. However, if its final interpretation business takes off, NightHawk may be exposed to reimbursement risk as those organizations can reduce the profitability of covered services. NightHawk has limited financial risks, as it carries no debt.

What the Market Is Missing: Worries about increasing price competition within the industry and uncertainty about NightHawk's position in its new daytime teleradiology business have caused the market to discount the firm's profitable operations, its leading industry position, and its claim over the industry's scarcest resource: U.S. radiologists. Yiu thinks NightHawk's efficient processes, relatively high customer retention rate, and industry growth opportunities make the stock a good bargain at current prices.

* Price/fair value ratios calculated using fair value estimates and closing prices as of Friday, June 15, 2007.