The 10 Best Values in Pharma and Biotech

Study after study has shown that stocks with low price-to-earnings multiples significantly outperform high P/E stocks. Research from my favorite investing guru, NYU professor Aswath Damodaran, pegged the outperformance at anywhere from 9% to 12% per year, depending on the study period. That's big money we're talking about.

But you already know that you can't just go out and buy the stocks with the lowest multiples. Companies can trade at dirt cheap prices for a number of dire reasons, including low growth prospects, skepticism about earnings, or high risk of bankruptcy.

These dangerous stocks can quickly crater. Buy too many of them, and you'll increase your own risk of bankruptcy!

Thus, for a firm to be truly undervalued, Damodaran says in his book Investment Fables: "You need to get a mismatch: a low price-to-earnings ratio without the stigma of high risk or poor growth."

Of course, you're unlikely to find any high-growth, low-P/E companies out there. But Damodaran suggests setting a reasonable minimum threshold for earnings growth, such as 5%. There are also various ways to minimize risk, including staying away from volatile stocks or companies with dangerous balance sheets.

The screen's the thing
We're looking for companies with low price-to-earnings multiples, but also a relatively low amount of risk, and the potential for reasonable growth. Our screen today will cover the best value plays in the pharmaceuticals, biotechnology and life sciences industry, as defined by my Capital IQ screening software.

There are 110 such companies with market caps topping $500 million on major U.S. exchanges. They have an average forward P/E of 20.7. Here are my parameters:

  1. In order to stay away from bankruptcy risk, I used Damodaran's suggestion and only considered companies with total debt less than 60% of capital.
  2. In hopes of capturing a reasonable amount of growth, I looked at Capital IQ's long-term estimates, and kept only companies expected to grow EPS at 5% annually or better over the next five years. Furthermore, I required at least 5% annualized growth over the past five years.

Of the 23 companies passing the screen, here are the 10 with the lowest forward price-to-earnings multiples:

Company

Market Cap
(in millions)

Forward P/E

Debt-to-Capital

Estimated EPS
Growth

Add to Your Watchlist

Endo Pharmaceuticals
(Nasdaq: ENDP  )

$4,716

9.3

37%

11%

Add

 

Teva Pharmaceutical
(Nasdaq: TEVA  )

$44,969

9.8

24%

12%

Add

 

Gilead Sciences
(Nasdaq: GILD  )

$33,067

10.3

36%

15%

Add

 

Amgen
(Nasdaq: AMGN  )

$51,794

10.8

36%

8%

Add

 

Abbott Laboratories
(NYSE: ABT  )

$80,320

11.3

46%

10%

Add

 

Johnson & Johnson

$165,952

12.5

23%

6%

Add

 

Life Technologies

$9,540

13.7

41%

12%

Add

 

Thermo Fisher Scientific
(NYSE: TMO  )

$21,362

13.7

12%

12%

Add

 

Hospira

$9,366

14.2

35%

20%

Add

 

Biogen Idec
(Nasdaq: BIIB  )

$20,041

14.2

18%

8%

Add

 

Source: Capital IQ, a division of Standard & Poor's.

There are lots of good research candidates here. To further stack the odds on your side, Damodaran says you can eliminate any companies that have restated earnings, or had more than two large restructuring charges over the past five years. And if volatile swings in price cause you to lose sleep, consider only companies with betas less than one.

If you're interested in keeping up with any of these companies, add them to your free watchlist by clicking the appropriate "add" button in the table. You can keep up with my other screening adventures by checking my archive and following me on Twitter.

Fool analyst Rex Moore received his first scar in a Bourbon Street bar. He owns shares of Johnson & Johnson. Johnson & Johnson and Thermo Fisher Scientific are Motley Fool Inside Value recommendations. Gilead Sciences is a Motley Fool Stock Advisor recommendation. Teva Pharmaceutical Industries is a Motley Fool Global Gains pick. Johnson & Johnson is a Motley Fool Income Investorrecommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Abbott Laboratories, Johnson & Johnson, and Teva Pharmaceutical Industries. Alpha Newsletter Account, LLC owns shares of Abbott Laboratories and Johnson & Johnson. 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.


Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1477706, ~/Articles/ArticleHandler.aspx, 8/21/2014 1:09:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement