A Case of Vertigo From Vertex Pharmaceuticals?

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous so looking for stocks based on what you already know and own might be a path to pursue.

Motley Fool CAPS, the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to fives, helps you focus your attention by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list and then scans stocks picked by highly rated players with lists similar to yours as well as industries in which you currently have active picks, and targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my having weighed in on a number of biotech firms like Arena Pharmaceuticals (ARNA), MannKind (MNKD -0.24%), and BioReference Labs (BRLI.DL) that I've rated to outperform the broad indexes -- along with more than a few that I've rated to underperform, such as Cell Therapeutics (CTIC) and Sarepta Pharmaceuticals (SRPT 1.49%) -- the CAPS supercomputer thought I also might be interested in another biotech, this time Vertex Pharmaceuticals (CBI), a maker of hepatitis C therapies. It was one of five Stocks of the Day it offered up for my consideration this week.

Infectious diseases like hep C drugs were all the rage at one point because of their potential, but just remember, as smart as the CAPS algorithm may be, it's still just an algorithm. So be sure to look before you leap on any of its suggestions.

Vertex Pharmaceuticals snapshot

Source: FinViz.com, N/A = not applicable. Vertex doesn't pay a dividend.

In my sights
The shocking decline suffered by Vertex's stock after it reported last month its lead hep C drug Incivek witnessed a 23% sequential decline and a 40% year over year drop off in revenues must have investors wondering whether they should give up and focus instead on its treatment of cystic fibrosis. There it's got the top drug name in Kalydeco -- which treats not the symptoms of the disease, but the underlying cause, and is really the only drug that does so.

The global hepatitis market was estimated at around $5 billion in 2009. As a result, it's a crowded market, too, with big name pharmas like Merck (MRK 1.98%), GlaxoSmithKline (GSK 0.38%), and Roche all seeking out treatments.

Yet some believe that Gilead Sciences (GILD -1.82%) may have the inside track on success with with its drug GS-7977, which when combined with ribavirin, completely eliminated the hep C virus in genotype 1 patients after four weeks. Bristol-Myers Squibb's (BMY -8.21%) purchase of Inhibitex to get into the hep C market may all go for naught if that's the case, but Abbott Labs (ABT -0.33%) own treatment may give Gilead a run for the money too if it holds up. As I said, it's a crowded marketplace here.

Still Vertex has its own ace in the hole, VX-135, which Johnson & Johnson (JNJ -1.16%) and Glaxo have agreed to partner up on and pay for development. So I wouldn't count Vertex out of the game just yet, but its projections of sales for the coming year may be a bit rosy based on current results meaning investors might be in for additional misses if it doesn't gain traction again.

Over the long haul, though, and because of Kalydeco, I believe it could be a good long- term investment. Earlier this summer, I thought Vertex was trading at valuations that were too high, particularly when Gilead was trading at about half that premium and the big pharmas -- with a broader, more stable portfolio -- also offered discounts. Even after the drubbing the stock has taken, it still carries some nosebleed multiples, but when you look at the growth rates analysts are assigning it, it becomes more reasonably priced.

Although I think it might suffer a few more setbacks because of its projected sales of Incivek, I'm going to rate Vertex to outperform the indexes. Tell me in the comments box below, however, why you might think Vertex Pharmaceuticals might be able to inoculate itself against such misfortune.