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3 Stocks That Have Lost Their Appeal

3 Stocks That Have Lost Their Appeal

Early in July, Morningstar's equity analysts updated their list of high-conviction picks. Three of the stocks cut from the list were BioMarin Pharmaceutical BMRN, Caterpillar CAT, and Intercept ICPT.

We removed BioMarin from the list because of share appreciation. BioMarin's orphan-drug portfolio and strong late-stage pipeline continue to support a narrow moat, but we think the market has recognized the full potential of the firm's late-stage pipeline in hemophilia and achondroplasia, with two potential drugs launching by 2021.

While we believe Caterpillar has the opportunity to increase its high-margin service revenue, its current trading price is sufficiently close to our fair value estimate that we removed it from our picks list. Investors have largely incorporated potential upside from future stimulus packages that may include significant infrastructure spending. COVID-19 has aggravated a cautious capital investment environment that may persist into 2021, creating near-term headwinds for equipment manufacturers as their customers hold off on large purchases while the economy recovers.

Lastly, we removed Intercept from the list after the U.S. Food and Drug Administration issued a complete response letter indicating that the firm's leading drug candidate for the treatment of NASH isn't ready for approval. That cuts into any potential first-mover advantage, which was fundamental to our thesis on the stock. We've therefore lowered our fair value estimate for the stock and no longer consider it a high-conviction idea.

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