10 Mid Caps to Rule Them All

No folks, that's not a misprint. After countless weeks of searching for the 10 small caps to rule them all, the only logical follow-up is to expand to the realm of mid-cap companies and offer up one idea a week that could add some pep to your portfolios step.

The mission here is essentially the same: I'm seeking out growing companies that offer distinctive products or exceptional value to investors. What has changed are the market value requirements ($1 billion to $10 billion) and the implied risk. Unlike small-cap companies that offer investors the potential for high-risk, high-reward returns, mid-cap companies usually have significantly less risk built in because of their proven business track records.

For the kickoff of finding 10 mid caps to rule them all, I would like to highlight biotechnology "sleeper" Jazz Pharmaceuticals (Nasdaq: JAZZ  ) .

What it does
Why would I call Jazz Pharmaceuticals a sleeper? Mostly because its primary drug, Xyrem, is used to treat narcolepsy. Xyrem made up about 85% of Jazz's first-quarter revenue and is the main driving force behind the company's rapid growth. Not to be forgotten, Jazz also markets Luvox, an obsessive compulsive disorder therapy that saw sales rise 29% last quarter to $7.1 million.

How it stacks up
I immediately know that critics will point to Jazz's product pipeline and cry wolf because beyond its two marketed drugs things are looking a bit thin. Jazz announced during its quarterly filing that it was going to discontinue clinical trials in JZP-6, its fibromyalgia drug that failed to get past the Food and Drug Administration. This leaves the company with just two very early stage drugs left in development. Luckily for investors, this shouldn't matter much because the market for Xyrem and Luvox are, in my opinion, strong enough to potentially double Jazz's current market value.

Let's take a quick glance at Jazz Pharmaceuticals and see how it stacks up next to other narcolepsy drug manufacturers:

Company

5-Year Expected Growth Rate

Forward P/E

Jazz Pharmaceuticals 14.1% 6.8
Cephalon (Nasdaq: CEPH  ) 7.0% 14.2
GlaxoSmithKline (NYSE: GSK  ) 11.5% 10.7
Novartis (NYSE: NVS  ) 4.0% 10.9
Pfizer (NYSE: PFE  ) 2.8% 9.3

We do have to take into consideration that companies like Pfizer, Novartis, and Glaxo have significantly more diverse drug portfolios than Jazz, but at what point do you say enough is enough and buy into a 14.1% growth rate trading at a mouth-watering 6.8 times forward earnings? Teva Pharmaceutical (Nasdaq: TEVA  ) snatched up Cephalon two weeks ago despite its five-year expected growth rate being only half that of Jazz Pharmaceuticals. That leads me to my next point...

How it could make you money
Although Jazz has thus far successfully chosen to go it alone on Xyrem and Luvox, it wouldn't surprise me one bit to see one or more of these aforementioned narcolepsy market competitors make a bid for the company. Jazz possesses the quickest growing narcolepsy drug on the market, and thanks to Xyrem it's now a cash-generating machine. The company would need to trade roughly 50% higher just to be in line with the forward P/Es of its rivals -- and that doesn't even factor in its significantly higher growth rate!

On the flip side, if Jazz were to remain an independent biotechnology company, it should fare better than its rivals. The company raised its full-year earnings guidance yet again during its quarterly filing and now expects to earn $2.95 to $3.10 for the year. This is up from prior guidance of $2.70 to $2.90 a mere two months ago.

Xyrem is a monster and whether its rivals want a piece of Jazz, the company looks inexpensive and poised for long-term success. It's for that reason that Jazz becomes my first addition to the 10 mid caps to rule them all.

What's your opinion of Jazz Pharmaceuticals? Is this a stock to buy, or is there something I'm missing? Share your thoughts in the comments section below and consider adding Jazz Pharmaceuticals as well as your own personalized list of stocks to My Watchlist.

The Fool has written covered calls on GlaxoSmithKline and owns shares of Teva Pharmaceutical and GlaxoSmithKline. Motley Fool newsletter services have recommended Pfizer, GlaxoSmithKline, Novartis, and Teva Pharmaceutical.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never falls asleep at the wheel.


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