Lannett

01/06/2015 7:00 am EST

Focus: STOCKS

John Reese

Founder and CEO, Validea.com And Validea Capital Management

John Reese analyzes the investment strategies of the stock market's most legendary investors for his Validea newsletter. His top speculation for the coming year is favored by his investment screens based on Peter Lynch and Joel Greenblatt.

Lannett (LCI) is a 72-year-old Philadelphia-based firm that makes generic prescription pharmaceutical products for customers throughout the United States. The company has a $1.5 billion market cap.

Lannett markets its products primarily to drug wholesalers, retail drug chains, distributors, and government agencies.

In part because of the early-year biotech bust, Lannett shares have had a volatile 2014.

But the company has continued to grow earnings and revenue at an impressive clip and two of my models think now is a good time to be buying.

The strategy I base on the writings of mutual fund legend Peter Lynch likes Lannett's 47% long-term earnings per share growth rate (using an average of the four- and five-year EPS growth rates) and its reasonable 15.6 price/earnings ratio.

Those figures make for a stellar 0.33 price/earnings-to-growth ratio, a metric Lynch developed to find cheap growth stocks.

My Joel Greenblatt-inspired model also likes Lannett. The firm has an 11% earnings yield (EBIT/enterprise value) and a 46% return on capital (EBIT/tangible capital employed), excelling on both of the strategy's key tests.

Its size and industry make for more potential volatility, but my models think that the stock's long-term prospects look good.

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