Just as we examine companies each week that may be rising past their fair values, we can also find companies trading at what may be bargain prices. While many investors would rather have nothing to do with stocks wallowing at 52-week lows, I think it makes a lot of sense to determine whether the market has overreacted to a company's bad news, just as we often do when the market reacts to good news.
Here's a look at three fallen angels trading near their 52-week lows that could be worth buying.
Buy the dip
Since mid-January, shareholders in enzyme research and drug-delivery specialist Halozyme Therapeutics (NASDAQ:HALO) probably wish they'd buried their heads in the sand. Halozyme is down more than 50% on a combination profit-taking and last week's news that the company was temporarily halting enrollment and dosing of patients in a planned phase 2 pancreatic cancer study involving PEGPH20 on the recommendation of the independent data monitoring committee.
While I certainly wouldn't brush off the temporary hold as a nonevent, I believe investors should consider that 1) we're talking about an earlier-stage therapy that shouldn't be given a substantial value to begin with, and 2) Halozyme was clear that the committee's hold recommendation was temporary while it further investigated the occurrence of thromboembolic events.
I also think shareholders are really discounting the longer-term potential for Herceptin SC and MabThera SC.
Both drugs derive from a collaboration between Halozyme and Roche (NASDAQOTH:RHHBY) that was signed in 2006. Herceptin SC is a subcutaneously delivered formulation of breast cancer drug Herceptin that can be administered in two to five minutes rather than the typical 30 to 90 minute infusion process normally associated with an IV. Halozyme's component does its part by allowing tissues to more quickly absorb Herceptin, making delivery a snap. Considering that Herceptin sales totaled $6.9 billion last year, assuming Herceptin SC ramps up to $2 billion in total sales within the next three years due to simple convenience, Halozyme would be set to receive approximately $100 million in royalties based on its mid-single-digit royalty rate.
Similarly, MabThera SC, which is a subcutaneous version of cancer and arthritis medication Rituxan, was approved in the European Union just two weeks ago as a therapy for patients with follicular lymphoma and diffuse large B-cell lymphoma. As with Herceptin SC, Halozyme is in line to receive a mid-single-digit royalty rate, as well as milestone payments from the approval. With sales of $7.8 billion last year, MabThera/Rituxan could be another big win for Halozyme.
All told, Wall Street's annual peak sales estimates for FDA-approved recombinant Hylenex are roughly $200 million. Add on what could be an additional $200 million-$300 million in annual royalty sales from Herceptin and MabThera/Rituxan by 2017 and you have a company valued at less than two times peak sales. In my opinion, that values Halozyme's pipeline as nonexistent and completely discounts further research, especially with profitability likely to come in 2015. For biotech-savvy investors, Halozyme is worth a closer look.
Set sail with this stock
Sticking within the health-care sector we'll next move on to pharmacy benefits manager and information technology developer Catamaran (UNKNOWN:CTRX.DL).
Like most health-care companies over the past couple weeks, Catamaran has been hit hard by fears of overvaluation (trailing P/E of 34), as well as speculation that uncertainty surrounding Obamacare enrollments, despite overall enrollment hitting its targets, may not lead to an increase in prescriptions written. Furthermore, Wall Street's earnings-per-share estimates for Catamaran have been falling steadily over the past three months, leading shareholders to abandon ship.
However, it could be time to set sail for Catamaran as long as you believe the health reform system will continue to reduce the number of uninsured.
Although spending by a number of health-care companies has been tepid at best in lieu of Obamacare's implementation, I feel fairly confident that a greater number of insured people will result in more visits to doctors and more total prescriptions written. Just last year, with its Restat acquisition, Catamaran saw total revenue climb 49% to $14.8 billion, as adjusted EPS soared 68% to $2 per share. Its adjusted full-year guidance of $2.04-$2.19 in EPS in fiscal 2014 might seem a bit tepid at 5% growth at the midpoint, given its rapid ascension last year, but it also takes into account the uncertainties surrounding Obamacare.
Also consider that Catamaran retained its elephant last year, signing a 10-year PBM agreement with CIGNA (NYSE:CI) which expanded on an existing collaboration. Under the terms of the deal, CIGNA maintains all aspects of describing and pricing available drugs, and handling all marketing and client-facing functions. Catamaran will deal with the actual drug-procurement process as the two put their heads together to secure top-notch pricing, especially on generics which now dominate the pharmacy scene.
At just 16 times forward earnings, Catamaran appears inexpensive considering the expected growth in the PBM business from Obamacare. Perhaps now is the time for investors to take a deeper dive into this company.
Give this stock a gold medal
Lately, shareholders in taxicab medallion financier Medallion Financial (NASDAQ:MFIN) have only seen red as the stock has tumbled on the prospect of more competition from the likes of start-ups such as Lyft. The thought here is that companies that offer an easier barrier to entry could tear down the lofty prices of medallions in New York City, which are owned in large part by Medallion Financial.
Those worries are nothing more than rumors at present, and Medallion's operations are stronger than ever. In mid-February Medallion reported record full-year earnings of $1.16 per share as its net interest margin expanded 35 basis points and its dividend jumped to its highest point in 13 years. In addition, not a single one of its medallion loans was more than 90 days delinquent, which speaks to the phenomenal credit quality of its portfolio. Simply put, you can't find many financial-service companies that will deliver a net interest margin of nearly 6.7% in this anemic interest rate environment.
If that weren't enough, as I mentioned above, the barrier to entry in the medallion business is extremely high, as few competitors have enough capital to compete and the number of medallions is fixed. The end result is that these owned medallions have soared in valued over the years. Medallion Financial has also been able to use low lending rates to its advantage, lowering its own rate of interest paid on money borrowed to boost its bottom line.
Finally, Medallion offers one of the top dividends around, currently yielding 7% and raising its payout on a number of occasions over the past decade. At a mere 11 times forward earnings, it could be time to flag down this taxicab medallion owner for your portfolio.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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