Extensive anxiety has dominated markets for a couple weeks now and all-in-all stock prices and index...
Market Gems: Biotechs to Blue Chips
06/26/2015 10:00 am EST
Bret Jensen of Investors Alley, has launched two new advisory services, one focused on high quality blue chips for conservative investors and the other focused on biotech stocks for the more speculatively inclined. Here, he discusses the strategies behind the two newsletters and walks us through some of his current recommendations.
Steven Halpern: Our guest today is Bret Jensen of the leading newsletter publication company, Investors Alley. How are you doing today, Bret?
Bret Jensen: Great, Steve. How are you?
Steven Halpern: Very good. Now—at Investors Alley—you’ve just launched a new service called Biotech Gems. Could you explain a little bit about the new service to our listeners and walk us through your strategy with biotechnology stocks?
Bret Jensen: Certainly. The nexus for launching Biotech Gems is that it is a sector of the market that I’ve always done very well at over the past few decades.
Some of the biggest winners in our Small Cap Gems portfolio that launched in July of last year—such as Eagle Pharmaceuticals (EGRX) and Agenus (AGEN)—tripled, quadrupled, and quintupled; so there was a demand for a biotech focused-newsletter, which we just launched.
Our investment strategy right now simply is to build the portfolio slowly because biotechs have outperformed the overall market for five straight years, the first time any sector has done that since they started keeping records.
In addition, we’ve had some great runs so far this year, especially among the smaller biotechs. I believe, last time I looked, nine of the top 10 performers—as far as stocks this year—are in the smaller biotechs, two of which we had within the Small Cap Gems portfolio.
We’re really going to bring a portfolio management focus on building a biotech portfolio. The portfolio is going to consist of five stable, large-cap growth names. These are stocks that have real products, real earnings, impressive cash flow growth that are selling at reasonable valuation, such as a Celgene (CELG), Biogen Idec (BIIB), Gilead Sciences (GILD).
Then we are going to go ahead and have 15 small—speculative but promising—small-caps to go ahead and balance the more stable part of that portfolio.
Now, depending on the investor’s risk profile, we are going to go ahead and advocate that each of the five large-cap positions are weighted three to six times greater than each of the small-cap stocks—which I put in and like to call Shotgun Investing—where we can make some very small stakes in a lot of promising concerns instead of putting all your eggs in one basket.
This will leave the large-cap portion of the biotech portfolio at 50% to 75% of the overall portfolio. This should decrease the volatility and really mitigate the risk while still giving some really good upside performance should we get another Eagle or Agenus within the portfolio, so that’s the strategy that were going with.
We’re going to go ahead and build a portfolio of about four stocks every month until we get a full 20 stocks of my top 20 stocks and then will make modifications in the months ahead as price targets are bought out and so forth.
Steven Halpern: Let’s touch on a couple of individual issues. As you mentioned, one of the stocks you like in the biotech sector is Gilead Sciences, which you consider one of the cheapest large-cap growth stocks around. Could you expand on that?
Bret Jensen: Certainly. Gilead Sciences is a biotech juggernaut that people continue to doubt, even though it’s one of the top 10 performers in the NASDAQ since 2000. It’s still growing an incredible amount. It should grow revenues 15% to 20% this year, earnings over 30%, and it’s selling at 11 times forward earnings.
It is also getting much more shareholder friendly. It has initiated the first dividend they’ve ever paid, which yields about 1.5%. They’re going to buy back about $15 billion worth of stock over the next couple of years—because their free cash flow this year will be $10 billion to $15 billion, Goldman says—$60 billion to $70 billion of free cash flow over the next five years.
For a company that has about a $160 billion market cap, that’s a really impressive free cash flow yield. They own the HIV space along with the hepatitis C.
The two drugs they launched last year, Sovaldi and Harvoni—for the treatment of hepatitis C—not only have 95% sure rate, but they are the biggest blockbusters by first-year sales of any drug in history.
It’s just a very misunderstood stock. It’s finally starting to run again in what I consider an overbought market—and slightly overbought sector—it’s great value here.
Steven Halpern: Now, you also like a lesser-known firm, Synergy Pharmaceuticals (SGYP), which has just recently had a huge jump in price. What’s the story here and is it too late for investors to get involved?
Bret Jensen: Synergy definitely had some really good news recently. One of its two lead drug candidates—it’s a guanylate cyclase, plecanatide, which is going to be treating a form of chronic constipation—had really, really good phase III results. It’s looking like its going to go through and get a new drug application.
The current drug that’s out there is inferior in some ways to Synergy’s product and it does about $600 million to $700 million of annual sales.
Now, this is a very small-cap stock, but still, I’d buy it on any kind of pullback here, but it’s exactly the kind of shotgun investment small-cap stock we have within Biotech Gems, because when these trials work out, you get a huge gain.
Obviously, most trials don’t work out and you have a huge loss, so you really need to go ahead and balance that with Synergy. We caught the right stock at the right time. I still think it has further upside, even trading at $7. The analysts are around $10 to $12 a share as far as their price targets and that was before the successful trial results were just announced.
People who were not in it, I would wait to probably start building a little small share here—dollar-cost average—and we do get a pullback in the overall biotech sector—which I think is likely before the end of December—then you can go ahead and average down some more. It’s a really good story right now.
Steven Halpern: Now, at the other end of the risk spectrum, you’ve also recently launched an advisory service called Blue Chip Gems. We only have a minute left, but I was wondering if you could outline some of the goals of the service and perhaps comment on a stock or two that fit into that Blue Chip Gems strategy.
Bret Jensen: Oh, absolutely. Although I’d love to talk about biotechs and all the other high-beta sectors because you can have outside returns, the majority of one’s portfolio—from a long-term perspective—should be in the large-cap growth area right now, offering reasonable valuations and much lower volatility.
We are putting together a 20-stock portfolio. Those kinds of names are going to have steady earnings and revenue growth, good growth prospects, and still pulling at a reasonable valuation.
A perfect example would be Apple (AAPL), probably—other than Gilead—it is the biggest, easiest, one-decision stock out there in the market.
Take out cash. It’s selling at 11 times earnings and dominating its market.
Everyone talks about Apple, but it is a core mainstay and any kind of large-cap growth portfolio, it’s, as Jim Cramer would say, it’s not the stock you trade it’s the stock you hold.
The other stock I really like right now and has done well for us since being included is JPMorgan (JPM). Obviously, rising interest rates are good for financials.
Whatever the next administration is going to be is probably going to have less of an impact on banks as far as regulations and fines and will pass them in this financial crisis, going for like 11 times forward earnings and yielding almost 3%.
These are a couple of typical names and that kind of a large-cap growth stock is what Blue Chip Gems is all about.
Steven Halpern: Again, our guest is Bret Jensen. Congratulations on the launch of both Biotech Gems and Blue Chip Gems and thanks for your time today.
Bret Jensen: Thanks, Steve, for having me. I really appreciate it.
Related Articles on STOCKS
I am recommending Harris Corporation (HRS), a company that is emerging as America's leading provider...
It is a global market as most realize. BMW makes all of certain SUV series in Spartanburg, South Car...
We’ve written about the secretive augmented reality startup, Magic Leap, which has raised big ...