Upside's Best Buys in Clinical Research

05/21/2015 8:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

Medical advances and an aging population suggest health-related spending will remain on an uptrend, observes Richard Moroney, editor of Upside.

However, given their strong performance, now seems an especially bad time to chase second-tier health stocks. Today’s environment calls for selectivity. Two of our Best Buys are both involved in clinical research services.

ICON (ICLR) is our favorite healthcare pick. As a leading contract research organization (CRO), it performs clinical trials for healthcare companies.

The stock earns a 95 for Overall, second-highest among the 37 stocks in the life-sciences industry. Five of six Quadrix category scores exceed 80.

Analyst estimates have risen in sympathy with management’s bullish 2015 outlook, calling for per-share profits to jump 20% to 25% on sales growth of 7% to 9%.

ICON has reeled off 12 straight quarters of double-digit revenue growth, while operating profit margins have expanded in each of the past ten quarters. Pfizer accounted for 31% of ICON’s revenue last year.

ICON shares have soared 38% in 2015. That rally has pushed the trailing P/E ratio to a lofty 25, though it still offers a 4% discount to its five-year average and a 9% discount to its sector median. ICON is a Best Buy.

Parexel (PRXL) is another provider of clinical research services. Over the long-term, the company posts consistent growth in earnings and cash flow and enjoys a large backlog, as drug and biotech firm look to outsource research.

The stock slumped after reporting mixed results for its March quarter. Per-share earnings increased 18% to $0.66, matching the consensus.

Revenue rose only 2% and was below expectations but climbed 5% excluding unfavorable foreign currency movements. On March 31, the order backlog was $5.19 billion, up 5%.

For fiscal 2015 ending June, management trimmed its sales outlook but maintained earnings guidance, saying per-share profits should range from $2.65 to $2.83, implying at least 22% growth.

We also note that one of our favorite screens looks for short squeeze candidates. Paraxel has a short ratio above 10, which approximates the number of days needed to purchase all shorted shares based on average trading volume. Despite the mixed guidance, Parexel remains a Best Buy.

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