Low-priced stocks are often low-priced for a reason: They have significant problems to overcome. Yet for those that have fixed their problems, they may be ready to take off to the next level.
At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning single-digit investments. We identify them with a penny icon and by pairing up their opinions with some top companies trading for pennies on the dollar, relatively speaking, we may end up with more than just chump change.
Of course, just because a stock is low priced, isn't necessarily enough to suggest it will have an easier time recording big gains. Low-priced stocks are often low-priced for a reason. But this week we look at drug developer PDL BioPharma (Nasdaq: PDLI ) , which has seen its shares rise 35% over the past year, yet trades just over $7 a share and is garnering top honors at CAPS.
PDL BioPharma snapshot
|Market Cap||$993 million|
|Revenue, TTM||$356 million|
|Return on Investment (5-year)||37.5%|
|CAPS Rating (out of 5)||****|
Growth is growth
It's easy to see why investors have bid up shares of PDL BioPharma over the past year. With a passel of drugs on the market, the drugmaker is receiving royalties on global sales of drugs from some of the biggest names in the pharmaceutical industry, including Roche, Novartis (NYSE: NVS ) , Elan (NYSE: ELN ) , and Biogen Idec (Nasdaq: BIIB ) .
All of PDL's revenues in the second quarter came from royalties, and they were 3% higher than in the year-ago period. Macular degeneration treatment Lucentis enjoyed a 15% increase in sales for Novartis, multiple sclerosis drug Tysabri was up 13% for Elan and Biogen, and cancer therapy Herceptin saw sales rise 4% for Roche. Its other cancer treatment Avastin was stung after the FDA yanked approval for the breast cancer therapy and sales fell 1% in the quarter.
While it had to start paying back some royalties for international sales of Lucentis due to a settlement with Novartis, PDL inked a new deal with Roche for sales of metastatic breast cancer treatment Perjeta that analysts estimate could be worth as much as $1 billion. According to Roche, adding Perjeta to Herceptin and chemotherapy is the only regimen to have shown a significant improvement in survival rates without the cancer progressing compared to just Herceptin and chemo alone. PDL will begin receiving royalties for Perjeta this quarter.
Penny for your thoughts
Considering the growth in its drug portfolio on the market and the potentially much higher sales it can realize from new agreements, I'm surprised PDL BioPharma trades at what seems to be a big discount. The stock goes for just five times earnings and only for times estimates, and when you factor in how much analysts are expecting earnings to grow the pharmaceutical is trading at a fraction of that growth rate. Moreover, its enterprise value goes off at just five times the amount of free cash flow it generates, which is exceptionally cheap.
The risk here is that a certain patent tied to Avastin, Herceptin, Lucentis, Xolair, and Tysabri expired in Europe in 2009 and only through "supplementary protection certificates" issued by various countries has it continued to enjoy exclusivity. Those SPCs expire in 2014 while other patents will expire next year.
Make some change
CAPS member SamsaricSufferer believes PDL's pipeline of drug candidates should carry it through, and I believe the market has more than compensated for the risks associated with patent expiry. I've already rated it to outperform the broad market averages on CAPS, finding it a better bet these days than Bristol-Myers Squibb (NYSE: BMY ) , which is finding generic competition much sooner than PDL, and recently had a setback in its important hepatitis C portfolio. But you can tell me in the comments box below whether you think PDL BioPharma is a pharmaceutical penny stock that makes perfect "cents" for your portfolio.
With a dividend yielding 8.5%, PDL also offers investors an attractive payment as compensation for the risk it entails. However, The Motley Fool has found nine solid investment plays that won't cause you to lose sleep. Get your copy of this free report "Secure Your Future With 9 Rock-Solid Dividend Stocks" by clicking the link and downloading it today. Did I mention it's free?