Dr. Duarte's Profit Prescription
09/11/2015 10:00 am EST
Biotech investors need to look beyond traditional valuation methods, according to Dr. Joe Duarte. Here, the editor of Smart Tech Investor explains his 11-part system for selecting buys and highlights a trio of favorites in the biotech and medical technology sectors.
Steven Halpern: Joining us today is Dr. Joe Duarte, a Biotech expert for over 25 years and editor of Smart Tech Investor. How are you doing today, Joe?
Dr. Joe Duarte: Great. Thanks for having me, Steve.
Steven Halpern: Well, thanks for taking the time. You’ve suggested that traditional valuation analysis does not work well with many stocks in the Biotech arena. Could you explain the need for an alternate way of evaluating stocks in this area?
Dr. Joe Duarte: Sure. The traditional Biotech stocks are pretty simple. They’re companies that have products that often are in the research stage and thus depend on outside capital to keep the company going.
If the company has a product that does not deliver on expectations, the stock usually craters, and then, so, although there are now many companies that have transcended from that level, Biotech still remains kind of a landmine-latent sector.
What we do is we took more traditional valuation methods and looked for a group of five that are still in Biotech but will have the ability to fulfill that criteria and that’s what our system is built on.
Steven Halpern: So, to account for the unique nature of evaluating biotechs, you’ve developed a proprietary system called the Emerging Biotech Investment System—or EBIS—which combines 11 fundamental criteria. Could you explain how this system works and perhaps walk us through some of the primary factors in this system?
Dr. Joe Duarte: Yes, so 11 criteria is a lot to keep tabs on during a short interview like this. To summarize it, first thing what we do is we look at market cap; we look for two to four billion market cap companies, so it’s toward the smaller end of the mid-cap section.
We look for strong balance sheets, especially companies that have lots of cash that they can use to survive during tough periods as well as to make acquisitions.
We’d like earnings, revenues, billing, the most possible. We like to have it at 10% or above.
We also like companies that have mixed products that have extended and possibly grown in demand and we also look for a pipeline strength, but the big emphasis is on the balance sheet and the revenue and earnings growth of the company.
Steven Halpern: Now, based on this EBIS system, one stock that stands out is Emergent BioSolutions (EBS). What’s the attraction here?
Dr. Joe Duarte: Well, again, EBS is basically like a prototype for this system. This is a company that focuses on vaccines, especially the Anthrax vaccine called Bio-Anthrax, and they’ve been steadily growing their earnings and their revenues for many years.
They’re basically a vaccine company and some of their money comes from government contracts.
And anyone who watches the news knows that there’s always a chance for some kind of terrorism attack or something like that—and certainly we don’t want that kind of thing to happen—but this is the type of company that continues to grow its business, based on a very real threat, and has a great income stream because it works for the government.
Steven Halpern: You’re also recommending a company called Masimo Corp. (MASI) which is a medical technology firm. What’s the story here?
Dr. Joe Duarte: Again, same kind of company. This is a company that has developed a wireless vital signs-monitoring complex of instruments. It started in the operating room but now they’ve grown it into being able to use it in intensive care units and even in the normal patient ward.
This is evolving as a particular growth area for them because most patients don’t end up going to the ICU and to the operating room. So, again, it has a strong balance sheet and a product mix that is growing, and not just growing in the United States, but internationally.
The big thing about Masimo is that as government and third-party players continue to look for economy to scale, these products are very competitive.
And if you're looking for better patient outcomes, what a better way to ensure that for them than to have them well monitored throughout an entire hospital stay.
Steven Halpern: Now, finally, your bullish on a company I’ve never heard of before, a medical device firm called Greatbatch (GB). Can you tell us about this company?
Dr. Joe Duarte: Yes. This is another one of those failed companies that just had a huge pop here in the last couple of weeks after we recommended it. They’re essentially the guys that make the equipment that big companies sell under their own brand name.
They have customers like Medtronic (MDT), Johnson and Johnson (JNJ), and St. Jude Medical (STJ) and they make pacemaker leads, they make batteries, and they make all kinds of neurostimulator leads and impregnable devices that Johnson & Johnson and the rest of those large companies sell under their own label.
What I really like about Greatbatch is that they have a lot of cash. They just made a big acquisition that expanded their market share and they also have—believe it or not—batteries and equipment that can be used in the energy market.
Where that’s kind of important is that you’ve got energy that has been so beaten down that anything from here that’s that kind of earnings growth for this company it’s just going to be icing on the cake.
Steven Halpern: Again our guest is Dr. Joe Duarte of Investing Daily’s Smart Tech Investor. Thank you for your insights, today.
Dr. Joe Duarte: Thank you.