Vertex: Still a "Top Pick"

04/07/2017 2:50 am EST


Crista Huff

Editor, Cabot Undervalued Stocks Advisor

In MoneyShow's annual Top Picks report in January, Crista Huff chose Vertex Pharmaceuticals (VRTX) as her favorite investment idea for 2017; the stock is now up 47%. Here's an update from the editor of Cabot Undervalued Stocks Advisor.

Shares of Vertex rose 22% following reports of successful results of Phase III studies of VX-661, a cystic fibrosis combination treatment. (The drug treatment is also named Tezacaftor/Ivacaftor.)

VX-661 showed significant improvement in patients’ lung function. Vertex will seek drug approval in the U.S. and the E.U.

There are currently 26 analysts covering the stock and issuing earnings estimates. Most of these analysts will be issuing updated research reports to their retail and institutional clients, generating additional excitement and confidence in the stock.

Vertex was your classic biotech stock that didn’t earn any annual profits — until 2016, when the company reported adjusted earnings per share (EPS) of $0.85. Consensus estimates pointed to $1.60 and $2.99 EPS in 2017 and 2018 (December year-end), representing EPS growth rates of 88.2% and 86.9%.

It is likely that consensus estimates will increase, depending on how soon the new drug begins booking revenues. The corresponding P/Es are well below the EPS growth rates; the stock remains undervalued.

VRTX rose past upside resistance at $103. It’s very normal for a stock to have a short-term pullback after such a big jump in the share price, but that doesn’t always happen.

In the coming days/weeks, a pullback could bring the stock back down around 103. I would consider that move to be temporary, and definitely a buying opportunity. The best-case scenario is that VRTX could rise to $140 this year, retracing its high from 2015.

I would not sell VRTX any time soon, because there’s still room for good capital gains this year. It’s okay to buy the stock right now, but odds are good that a pullback will bring a better purchase price.

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