Varian Leading Quiet Pharma Rally

03/31/2011 1:31 pm EST

Focus: STOCKS

Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Wall Street hasn’t caught up with the radiation treatment specialist’s strong prospects despite the stock’s healthy gains, writes Andrea Kramer of Schaeffer’s Investment Research.  

A recent article from TheStreet.com (“Drug Stocks Finally Make Their Move,” March 29) notes that drug stocks "have been beaten up in the year since the health-care reform bill has passed." However, fund managers are now "pouncing on shares of undervalued companies" within the sector.

Furthermore, Connor Browne, co-manager of the Thornburg Value Fund (TVAFX), says health care is a "pretty contrarian investment these days," but says the market's skepticism is "much too extreme."

One such diamond in the rough, according to this column, is Varian Medical Systems (VAR), which he says falls into the fund's emerging-franchise category. More specifically, Varian has a notable lead in the radiation-oncology market, and Browne predicts the firm's technology will improve its ability to successfully treat many stages of cancer.

In fact, he says, Varian spends more on research and development than the rest of the industry combined, and "there's a case to be made that the stock is trading cheaper than our calculation of intrinsic value."

Contrarian Takeaway
On the charts, shares of Varian have nearly doubled since August 2009, led higher atop their ten-week, 20-week, and 32-week moving averages. More recently, the stock pulled back to support at the latter trendline, which could point to an opportune entry point for longer-term bulls.

Plus, regardless of the equity's lengthy uptrend, five out of 12 analysts maintain "hold" or worse opinions, according to Zacks.

In the same vein, Thomson Reuters pegs the consensus 12-month price target on the security at just $73.75—representing a premium of only about 10% to Varian’s closing price of $66.96 on March 28. [The stock changed hands at $67.33 Thursday afternoon—Editor.]

Should the shares of Varian continue to climb the charts, an unwinding of skepticism in the form of upgrades or price-target boosts could stoke the security's bullish flames.

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