My Top Three Fabulous Pharma Stocks by Chuck Carnevale, F.A.S.T. Graphs
I am a fervent believer that investment decisions should be made based on the relative merits of each individual investment under consideration. However, my anecdotal observations and experience suggests that many investors do not embrace that approach. This is especially true regarding investment decisions on common stocks. Instead of focusing on the opportunities and valuations available from select individual businesses, many investors are obsessed, and I allege blinded by generalized views or beliefs about the overall market and/or the economy.
For example, in a recent article found here I postulated about reasons why carefully selected growth stocks might benefit retired investors under certain circumstances. In the article I presented a few examples of high-quality fast-growing businesses that I considered fairly valued based on their earnings growth rates. Unfortunately, and as I expected might happen, a comment made in the article rejected my carefully selected growth stock research candidates based on what I believe are misguided views about the market in general. The comment is included in its entirety as follows:
“I like growth stocks but not when the market is at all time highs and way overpriced as it is now. Just for example, the Russell 2000 is at a P/E of 40 and P/B of 4 – hardly compelling valuations.
Many growth stocks should be sold short here and that is what I am doing. When the market tanks (soon) I will close out my shorts and go long on some of the growth stocks I like.
Making a decision on buying a stock without looking at its relative valuation and that of the market is a dangerous proposition and one I am not interested in.”
To clarify my position, I offer the following elaboration and critique regarding why I found this comment concerning. First of all, the reference that the P/E ratio and price-to-book ratio of the Russell 2000 were at all-time high valuations was not relevant to the valuations of the individual research candidates I presented. Each of the companies I presented was offered because I believed their valuations were in alignment with their past, present, and most importantly, their future earnings potential. The valuation of the Russell 2000 was therefore irrelevant.
The second paragraph also offered a generalized view of growth stocks and suggested that they should be sold short. But again, I don’t believe this statement relates specifically to the candidates I offered in the article. Then the bold prediction was made that the market would tank soon, which of course, is impossible to accurately forecast. However, the comment also indicated that this could be timed to perfection by closing out shorts and then investing in growth stocks that were favored. Again, I contend that this is impossible to time or predict.
Finally, the comment suggested that buying a stock without looking at its relative valuation and that of the market was a dangerous proposition. Of course, I vigorously agree that investors should evaluate the valuation of the company, but only based on its specific fundamental merits, regardless of the valuation of the overall market. I elaborated on my belief that it’s a market of stocks and not a stock market in a recent article found here.
The Pharma Sector Powerful Demographic Forces Support Growth Potential
Therefore, I was motivated to offer this follow-up article on growth stocks for retirement portfolios by offering three attractive looking growth stock research candidates in the Pharma sector. Thanks to the demographic forces of an aging population, I contend that the Pharma sector offers enormous growth potential that is independent of the general economy or the stock market.
As I indicated in my previous article on the appropriateness of growth stocks in retirement portfolios, they are not necessarily a good fit for every retired investor. However, for those investors at or near retirement that are interested in adding some growth, I offer the following three Pharma growth stock opportunities that I am personally researching. Most importantly, my initial review indicates that each of these candidates are reasonably valued based on their respective future growth opportunities.
Three Fabulous Pharma Growth Stocks
Two of the following three Pharma growth stocks were originally previewed in my previous article. In this article I have added a third Pharma research candidate in what follows is my reasoning as to why I consider these attractive growth opportunities based on my preliminary research. Perhaps readers of this article that have more information or familiarity with any of these companies will help the rest of us by sharing their knowledge.
To get a free more detailed perspective on these three Pharma stocks, follow this direct link to a video on my site mistervaluation.com and watch and listen to me analyze these companies out loud via the FAST Graphs fundamentals analyzer software tool.
Actavis plc (ACT)
Actavis, my first research candidate, is well-positioned to serve the growing pharmaceutical needs of our aging population. The company offers both branded and generic pharmaceuticals worldwide.
Short business description courtesy of S&P Capital IQ:
“Actavis plc, a specialty pharmaceutical company, develops, manufactures, markets, and distributes generic, branded generic, branded, biosimilar, and over-the-counter (OTC) pharmaceutical products. It operates in three segments: North American Brands, North American Generics and International, and Anda Distribution.
The North American Brands segment provides patented and off-patent trademarked pharmaceutical products primarily under the Dalvance, Bystolic, Canasa, Carafate, Daliresp, Fetzima, Linzess, Namenda, Namenda XR, Saphris, Teflaro, Viibryd, Actonel, Asacol HD, Atelvia, Delzicol, Doryx, Estrace Cream, Enablex, Lo Loestrin Fe, and Minastrin 24 Fe brands.
The North American Generics and International segment develops, manufactures, and sells generic, branded generic, and OTC pharmaceutical products.
The Anda Distribution segment distributes generic and brand pharmaceutical products primarily to independent pharmacies, pharmacy chains and buying groups, and physician’s offices.
The company also develops and out-licenses generic pharmaceutical products primarily in Europe through its third-party business; and provides products in women’s health, gastroenterology, urology, and dermatology areas.
The company sells its generic and brand pharmaceutical products primarily to drug wholesalers, retailers, and distributors, including national retail drug and food store chains, hospitals, clinics, mail order retailers, government agencies, and managed healthcare providers.
It has a collaboration agreements with Amgen, Inc. to develop and commercialize biosimilar versions of Herceptin, Avastin, Rituxan/Mab Thera, and Erbitux; Ironwood Pharmaceuticals to develop and commercialize Linzessfor the treatment of irritable bowel syndrome with constipation and chronic idiopathic constipation; Sanofi-Aventis U.S. LLC; and Trevena for the development of TRV027. Actavis plc was founded in 1983 and is headquartered in Parsippany, New Jersey.”
Both demographics and acquisitions have stimulated accelerating earnings growth since 2011. Nevertheless, Actavis trades at P/E ratio that is less than its historical earnings growth achievement. However, the normal P/E ratio has moderately expanded as a result of extraordinary growth in 2013 and 2014.
Importantly, Actavis has also generated cash flow growth that is aligned with its historical earnings growth. Consequently, the company has ample resources to continue funding research and development and its reasonable 36% debt-to-capital ratio is well covered.
Growth in earnings and cash flow since 2010 has resulted in significant total returns for Actavis shareholders. Returns have significantly out-performed the general market, which is extraordinary when you consider