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Stock Screen: Growth Stocks with Moderate Risk - April 13, 2011
This screen is designed for investors seeking stocks with worthwhile long-term appreciation potential and low-to-moderate risk. Given that growth is the main criteria, it is not surprising that the list contains several names in the healthcare industry, including Gilead Sciences (GILD), Medco Health Solutions (MHS), and Teva Pharmaceutical (TEVA).
We began by screening for companies where share earnings have compounded at a minimum 15% annual rate over the past five years and that are expected to at least maintain a 10% annual growth rate over the next 3 to 5 years.
Next, we limited the list to stocks with price appreciation potential of 60%, or more, over the next 3 to 5 years, measured from the mid-point of each issue’s Target Price Range. To control for risk, we required that all stocks selected have Safety ranks that are 3 (Average), or better (i.e. 1 or 2). Going one step further, we also required that each company have a Financial Strength rating of B+ (Average) or better. Additionally, minimum standards were set for Price Stability scores. These factors should help select those companies with lower-than-average risk profiles. Finally, to guard against near-term underperformance, we required that all stocks be ranked 3 (Average), or better, for Timeliness (i.e. relative price performance in the year ahead). Investors should note that Safety, Financial Strength, Price Stability, and Timeliness are all proprietary ranks developed by Value Line.
Given these relatively stringent criteria, it isn’t surprising that there were only 14 issues in our universe that made the final cut. In fact, selecting growth stocks with the combination of worthwhile appreciation potential and low-to-moderate risk remains a difficult task, especially given the strength of the equity market over the last two years. Thus, the stocks listed below comprise an elite group. Many growth stocks, including some with better historical and prospective appreciation potential, were eliminated due to their less-than-stellar marks for Financial Strength or their volatile share price movements. We note, however, that the equities included below are likely to provide investors with worthwhile returns over the next 3 to 5 years, reflecting each issue’s prospects for price appreciation during that time frame.
Those wanting to hold less-risky stocks with good prospects may consider some of the choices listed below. As always, we strongly urge investors to consult the individual analyses in Ratings & Reports before committing to any of the issues that appear in this screen. All data are from The Value Line Investment Survey that went to press on April 8, 2011. Investors should note that this is only a partial list. To see all of the issues that our screen returned, complete with Timeliness, Safety, Price Stability, and Financial Strength ratings, subscribers can click here.
Gilead Sciences discovers, develops, and commercializes proprietary treatments for viral diseases. It markets its medicines in the United States and abroad. Some of the company’s drugs that are currently on the market include AmBisome (an antifungal agent), Atripla, Truvada, Viread, and Emtriva (for the treatment of HIV), Tamiflu (influenza), Vistide (for CMV retinitis in patients with AIDS), and Hepsera (for Hepatitis B).
The company achieved good top- and bottom-line gains in 2010, and we think that it will post healthy results in the coming quarters. Its recent acquisition of Calistoga Pharmaceuticals, a biotechnology company, which focuses on cancer-fighting treatments, complements its current roster. Good news surrounding its additional core product, CAL-101, should help spur earnings.
Moreover, we think that the company’s continued investment in research & development (13.3% of 2010 sales) ought to support its product roster and fuel long-term growth. For example, Gilead’s new HIV drug cocktail, QUAD, is in Phase III clinical trials. We expect the drug to hit the market in late 2012, and help lift results over the next several years.
There has been a lot of consolidation within the healthcare industry over the last few years, and this issue is often considered a takeover target. In our view, Gilead’s strong cash flow and healthy debt-to-capital ratio make it an attractive acquisition candidate. Moreover, the company’s specialized scientific knowledge, experience, and continued investment in manufacturing facilities and testing equipment has enabled it to target its niche market, which has high barriers to entry. Gilead’s HIV and AIDS treatments should continue to gain traction (as the epidemic spreads further, particularly in poorer African countries.) Too, its dominance in the retrovirus treatment field should bolster results, as the company develops new treatments for various ailments, including chronic fatigue syndrome. As a result, rumors regarding takeover candidacy may trigger the stock price’s movement, adding a certain amount of risk to these shares.
Medco Health Solutions
Medco Health Solutions is the largest, by revenues, pharmacy benefit manager in the U.S. Its prescription drug benefit programs cover approximately one out of five Americans, and are designed to drive down the cost of pharmacy healthcare. Medco’s programs are available to private and public employers, labor unions, and government agencies. Its services are often available to individuals covered by Medicare Part D Prescription Drug Program.
Higher prices for brand-name pharmaceuticals, a rise in prescription volumes, and new client growth helped Medco end 2010 on a strong note. Company profits should continue to advance at a healthy rate in the coming months. We think that the company’s mail-order segment will gain additional steam, thanks its new third-generation automated pharmacy in Indiana. Also, the integration of recent acquisitions BioSource and DNA Direct should bolster its current operations.
The company should benefit from better contributions from its specialty pharmacy division, Accredo Health Group. We expect that fewer generic introductions may moderate 2011 growth. But, many brand-name drugs are slated to lose their patent protection next year, expanding the number of generic drugs on the market. All told, we look for these factors to boost order volumes and the company’s overall dispensing rate in 2012.
Teva Pharmaceutical Industries
Teva Pharmaceutical Industries is a global pharmaceuticals company, based in Israel, that develops, manufactures, and markets generic and proprietary branded drugs and active pharmaceutical ingredients. Its branded products include: Copaxone (used to treat multiple sclerosis) and Azilect (a treatment for Parkinson’s disease).
The pharmaceuticals company has been bolstering its product pipeline to boost near- and long-term growth. Teva had over 200 product applications awaiting FDA approval as of February. It recently partnered with household goods giant Procter & Gamble (PG - Free Proctor & Gamble Stock Report) to build its over-the-counter offerings. This move, which will likely target key markets in Germany, Russia, Brazil and several emerging economies, ought to help the company broaden its geographic footprint. It may rely on acquisitions to help it extend its global reach, as well. To this end, Teva announced plans to break into the fast-growing Peruvian market, with its acquisition of Corporacion Infarmasa.
Despite the good news we anticipate, Teva’s branded drug business may sustain more competitive pressure in the coming months. Its competitor Novartis (NVS) introduced a new oral treatment for multiple sclerosis, which may erode Teva’s injected prescription, Copaxone’s position in the market. Additionally, other rival versions and very similar drugs could temper top- and bottom-line growth.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.