2 Beaten-Down Stocks That Still Aren't Worth Buying

Buying shares of excellent companies that have fallen out of favor is a great way to earn superior returns over the long run. However, investors should be careful not to catch a falling knife. Corporations often fail to keep up with broader equities for good reasons, and in many cases, it's not worth investing in market laggards, even on the dip. With that as a backdrop, let's consider two stocks that have moved in the wrong direction this year but remain unattractive at their current levels: Recursion Pharmaceuticals (NASDAQ: RXRX) and Sarepta Therapeutics (NASDAQ: SRPT).

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1. Recursion Pharmaceuticals

Recursion Pharmaceuticals is a drugmaker that relies on artificial intelligence (AI) to go from discovery to the market. The company is betting that its approach can succeed where other breakthroughs have failed: Even with significant technological progress over the past few decades, the cost and time required to develop drugs have increased. Recursion Pharmaceuticals uses an AI-powered algorithm to predict which candidates are the most likely to perform well in clinical trials and, eventually, earn approval.

To its credit, the company has several promising products in its pipeline. For instance, Recursion Pharmaceuticals' REC-4881 is an investigational medicine for familial adenomatous polyposis (FAP), a rare disorder that leads to the development of precancerous polyps in the colon and rectum, giving patients a very high risk of colorectal cancer if left untreated. REC-4881 has demonstrated encouraging reductions in precancerous polyp burden in early clinical studies.

Given that the U.S. Food and Drug Administration has never approved any medicine for FAP, REC-4881 could present an attractive commercial opportunity if it proves effective in late-stage clinical trials.

That said, there are several problems with Recursion Pharmaceuticals, one of which is that it has no products on the market, and none even in late-stage studies. For a company that claims to be bringing about a paradigm shift in the industry, we'd expect greater success. Perhaps it just hasn't had time yet, but Recursion Pharmaceuticals was founded in 2013. Second, although Recursion Pharmaceuticals may have hoped to build a competitive advantage through its focus on AI -- and eventually license its AI-powered operating system for drug discovery -- other corporations are making strides in this field.

Third, like every biotech company, it runs the risk of clinical or regulatory setbacks that could sink its share price. Those are some of the reasons Recursion Pharmaceuticals' stock has moved in the wrong direction and may continue doing so. It's not an attractive company for most investors, though contrarians with a strong tolerance for volatility may consider initiating a small position.

2. Sarepta Therapeutics

Last year, Sarepta Therapeutics faced significant challenges. Two patients taking the company's Elevidys, a medicine for a rare, progressive, neuromuscular disease called Duchenne muscular dystrophy (DMD), unfortunately died after developing acute liver failure (ALF). Sarepta Therapeutics was able to keep Elevidys on the market, but only for ambulatory DMD patients -- it is no longer indicated for non-ambulatory patients. Further, it now includes a boxed warning for acute liver injury (ALI) and ALF.

In fairness, Sarepta Therapeutics has made progress in overcoming these obstacles. The company is testing whether administering sirolimus (an immunosuppressant) before and after Elevidys infusion can help reduce the risk of ALF and ALI in non-ambulatory patients.

Elsewhere, the company has requested full approval for two of its other DMD medicines, Amondys 45 and Vyondys 53. Both were previously under accelerated approval, meaning they had to undergo confirmatory studies to confirm efficacy. Sarepta Therapeutics is also developing newer medicines for a range of other diseases. Solid clinical progress might jolt the stock.

However, there remain significant risks. Even with clinical progress with newer candidates and full approval for Amondys 45 and Vyondys 53, Elevidys remains central to Sarepta's prospects because it addresses the underlying genetic causes of DMD. If the company fails to show that giving patients sirolimus can mitigate Elevidys' adverse events, the stock will fall off a cliff. Even if it can prove that non-ambulatory patients have a lower risk of ALI and ALF when they also receive sirolimus, it will be hard for Sarepta Therapeutics to protect its market share as new DMD medicines gain approval.

That's why it's difficult for long-term investors to justify investing in the company, especially given the many attractive biotech stocks on the market.

Prosper Junior Bakiny has positions in Recursion Pharmaceuticals. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.