Battered Biotechs for a Watch List

05/06/2014 8:00 am EST


Stephen Quickel

Editor, US Investment Report

We are not yet ready to reinvest model portfolio cash; for now, our current Recommended List is really a Watch List—a slate of stocks to buy when this eager-to-rise market swings into a confirmed rally on strong trading volume, asserts Stephen Quickel, editor of the US Investment Report.

A stock market watch list is based on solid analysis of fundamental and technical factors. It has real substance. One reason for watching them instead of buying them now is that many are trading well off their 52-week highs.

Yet those on our List, whatever you chose to call it, show great growth prospects, much more reasonable valuations than a month ago, and are finding support levels from which they are beginning to launch comebacks.

Our Watch list includes a trio of battered biotechs. These stocks are not really new selections; all were star performers for us for more than a year before the March-April market correction brought them down.

While none of these stocks has yet made a true technical breakout, their prices appear to be snapping back, fueled by even higher earnings estimates. Though still down quite a bit, they offer a winning combination, very rapid earnings growth, and remarkably modest valuation ratios.

Celgene Corp. (CELG)

A specialist in cancer and immune-inflammatory diseases, CELG is still 18% off its $172 high, but offers 25% a year earnings growth, a forward P/E of 16, and a PEG of 0.64.

The stock still trades below its 10-week moving average, but has recovered from $137 to $146. Our target is $190.

Gilead Sciences (GILD)

It develops and markets drugs for HIV/AIDS, hepatitis B and C, cardiovascular, and respiratory diseases. Earnings growth is estimated at 30% a year.

The forward P/E is 10 for a stock that peaked at $84 in February and now has rebounded from $65 to $79. Our target estimate is $101.

Jazz Pharmaceuticals (JAZZ)

Smaller than CELG and GILD and based in Ireland, JAZZ specializes in narcolepsy treatments and its stock more than tripled to $175 in 2013-14.

At $146, and back above its 10-week moving average of $140, it’s expected to grow earnings 24% a year. It trades at a 14 forward P/E and a 0.58 PEG.

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