High-growth biotechnology stocks typically don't get a lot of love; they're often treated as pariahs on Wall Street. Case in point: The biotech sector is now down over 20% since July, compared to the S&P 500's loss of 4%.
With biotech valuations so low, it begs the question: should you dive in or refrain from venturing into this volatile arena?
For those with an appetite for risk, a sharp drop in prices is often reason enough to tank up on a stock. But that's not a wise investment method. Instead, we've found two biotech stocks that are not only cheap, but inherently strong and poised to rise. (On the flip side, here's a list of stocks you should avoid.)
Fact is, bottom fishing isn't bad if you know what to pick. The biotech sector has stocks that are hidden gems -- you just need to know what you're looking for. If even one of these goes the right way and company earnings surge, the upside can be tremendous.
Yes, press reports of scandals and elevated drug prices are darkening the skies for this sector. Even strong industry leader Gilead Sciences is down nearly 17% year-to-date. However, if you ignore the short-term media cacophony, there are great picks in the sector that provide exciting upsides from current depressed levels.
A superb example now is Biogen (BIIB - Get Report) . Biogen's third-quarter earnings beat analysts' estimates and management raised earnings and revenue guidance for the remainder of the year. A judicious mix of price hikes, inventory tailwinds and cost-cutting helped this biotech stalwart exceed expectations.
BIIB data by YCharts
Biogen's Alzheimer's drug candidate Aducanumab could be a promising source of growth for the company, which currently trades at 15.1 times forward earnings (compared to the whopping price-to-earnings ratio of 202 for the biotech sector as a whole). If Aducanumab is successful, a feat no other Alzheimer's drug has accomplished, it could be another blockbuster for the company.
The company is also working on anti-LINGO, a drug to repair damaged nerves. If early-user/test data indicate a meaningful benefit for patients, earnings and outlook could get a huge boost. With a price to growth ratio (five-year expected) of 1.07, the stock offers solid, bankable value. Add to this an estimated 15.8% growth in earnings for the next five years compared to the S&P 500's 6%, and the stock looks compelling indeed.
AMGN data by YCharts
In the massive sell-off that biotech stocks have recently endured, even good fundamentals have been overlooked, which brings us to Amgen (AMGN - Get Report) . Since July, the stock has corrected by 12%, as investors turned negative about the biotech sector as a whole.
With consistent gross margins at nearly 80% and solid operating margins above 30%, the company sits on a cash trove of $30 billion. In fact, the company can repay 93% of its entire debt burden with cash.
You also can't afford to ignore Amgen's healthy pipeline of products. These treatments target skin cancer, heart failure and osteoporosis among other ailments and deliver sustained boosts to the company's top and bottom lines.
Meanwhile, Amgen is also a consistent dividend-creator. Its trailing annual dividend yield at 2.98% makes it a good income addition to your portfolio. If the company's newly proposed products come to fruition, as expected, market-beating capital appreciation is in the cards. On the other hand, if the stock falls, Amgen's strong balance sheet would still allow it to maintain its dividend yield.
By Chiradeep BasuMallick
Source: http://www.thestreet.com/story/13337885/1/2-bargain-buys-in-the-beaten-down-biotech-sector.html?kval=dontmiss
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