Bret's Blue Chip Biotechs
09/28/2015 10:00 am EST
Blue chip biotechnology stocks with multiple products and strong pipelines are suitable for even conservative investors, according to Bret Jensen. The editor of Blue Chip Gems also highlights three favorites as part of a core biotech portfolio.
Steven Halpern: Joining us today is Bret Jensen, editor of Blue Chip Gems. How are you doing today, Bret?
Bret Jensen: I’m doing great, Steve. How are you?
Steven Halpern: Very good. Thanks for taking the time. As its name implies, Blue Chip Gems focuses on high quality stocks for long-term investing. Could you tell our listeners a little about the strategy underlying this service?
Bret Jensen: Certainly. Basically, Blue Chip Gems concentrates on the large-cap growth names in the market that have a sustainable competitive advantage and are selling at reasonable if not attractive valuations.
I believe that’s the way most people should place most of their allocation with their portfolios—especially when we have this kind of heightened volatility—and it’s really where the value in the market is right now, so some of the large-cap growth names, such as Apple (AAPL), obviously, is probably the most well-known stock in the market.
And despite the recent rally in the shares over the last 18 months, the stock is still cheap at about nine times forward earnings if you take out their 150 billion dollars’ worth of cash holdings.
So those are the type of large-cap growth stocks that we put in the portfolio. We don’t expect to hit homeruns on them, but these are the stocks that can outperform the S&P year-over-year by 5% to 10%.
Steven Halpern: Interestingly, you also offer an advisory service that focuses exclusively on biotech stocks, but along with that you believe that high quality biotech firms still have a place in any investor's blue chip portfolio, including in your portfolio at Blue Chip Gems. Could you expand on the role that biotechs could play for a conservative investor?
Bret Jensen: Absolutely. On the large-cap, you really need to breakdown the biotech sector into two parts, right?
On the small-cap part, where most of the stocks within the indexes are, you have a lot of small but promising concerns that are years away from any discernable earnings growth, provided the pipelines actually end up being trading some approved products.
Whereas on the large-cap side the stocks like Gilead Sciences (GILD), or Amgen (AMGN), or Celgene (CELG), really there is not that much difference in any other large-cap growth stock. They have visible earnings and revenue drivers.
They consistently churn out profits, so they are not that much different to value than the other large-cap growth names in the market, regardless of the industry. It’s a completely different bifurcated market when we’re talking about biotechs.
The large-cap growth names really, really benefit this part of the market because most of the biotech names are not dependent on overseas growth or what the strong dollar is going to go ahead and do.
And despite the challenging global economic backdrop we have right now they can consistently churn out revenue and earnings growth regardless of what is happening in China or Europe or anywhere else, so they have that added advantage right now.
Steven Halpern: You just mentioned three blue chip biotech stocks that could be the core of a portfolio and let’s walk through them individually. First, you mentioned Gilead Sciences. What’s the story at this company?
Bret Jensen: Gilead might be one of the cheapest large-cap growth stocks in the market. They basically have a lock on both the Hepatitis C market through their blockbuster drugs, Sovaldi and Harvoni, which did $5 billion dollars in sales last quarter, actually $4.9.
They also own the HIV market, which, that and their other drugs are doing about $3 billion dollars’ worth of sales, a quarter of them growing about 10% a year, and then they have a very promising pipeline with about 40 drugs spread over four focus areas in their development.
They also made news recently because they raised $10 billion dollars in the debt market and a lot of people are speculating they’re going to make a large acquisition in the near future.
Despite the fact their earnings are going to be up about 40% this year, the stock is selling at less than nine times forward earnings. Very, very cheap stock, initiating a dividend the first time this year, going to buy back about 15 billion dollars’ worth of shares in the next couple years as their free cash flow is just exploding right now.
Steven Halpern: Another favorite of yours is Amgen, which is one of the original pioneers in the industry. What’s happening at the company now?
Bret Jensen: Amgen has been a biotech pioneer for a while. They’re not growing nearly as fast as the other two stocks mentioned—Gilead and Celgene—but they have a very deep pipeline.
One of their drugs that just got approved is what’s called a PK-9 inhibitor, which is really the new genre of cholesterol drugs. It’s called Repatha. That’s probably going to do at least $2 billion dollars in annual sales by 2020.
Again, another one of those large-cap growth stocks that are going to grow regardless of what’s happening in the global economy, selling at a very reasonable multiple of about 15 times forward earnings in a slight discount to the market, despite the fact that it has superior growth in revenues and earnings compared to the rest of the S&P.
Steven Halpern: Finally, let’s look at Celgene, another core biotech favorite of yours. What’s the situation here?
Bret Jensen: Celgene has a couple of drugs that are growing very, very rapidly. They have REVLIMID, which is a blood cancer drug, which is about 60% of their sales right now. What I like about Celgene is they’re really getting involved in building their pipeline.
They bought Receptor for $7.2 billion dollars in July and they really just made a billion dollar collaboration deal with an immunotherapy company called Juno Technologies, so they’re really expanding their pipeline, showing really good double-digit growth on both the revenues and earnings.
And yet their price is a slight premium to the market, about 20 times forward earnings, but for that, you’re getting superior growth prospects with a good product portfolio and a very deep and expanding pipeline.
Steven Halpern: Is it fair to say that these are the types of stocks that you would be comfortable suggesting for investors to accumulate over the long-term, and even if there’s a market setback, you’d still view that as an opportunity?
Bret Jensen: Absolutely. These are stocks that you want to hold for the next three to five years, and if we get any kind of significant dip in the overall market, these are the ones that I personally am accumulating in my own portfolio.
Steven Halpern: Again, our guest is Bret Jensen of Blue Chip Gems. Thank you so much for your time today.
Bret Jensen: Thank you for having me on, Steve.