What are we looking for?
U.S. biotech and pharma stocks with strong revenue growth and reasonable valuations.
Donald Trump's surprise victory in Tuesday's U.S. presidential election caused huge volatility in the markets on Wednesday and Thursday. Although a few sectors were down, there were also some notable winners. Coal was one hot sector, with many individual names surging 5 per cent or more. Biotech and pharma stocks were the other big winners, driven mainly by a relief rally that Hillary Clinton would not be able to fulfill her campaign promise to provide additional oversight on drug pricing.
The screen
We begin by setting a minimum market capitalization threshold of $10-billion (U.S.) to focus on larger, more established companies in the biotech and pharmaceutical industries.
Next, we will look for companies with strong revenue growth as evidenced by their last quarterly reported revenue. We will select companies with quarterly revenue up 5 per cent or more from the same quarter a year ago.
To ensure we don't overpay for our investments we will use two valuation metrics. First, we will filter for companies with return on equity (RoE) of 10 per cent or more. RoE is a measure of how effective a company's management is at converting invested capital into income. Last, we will set an upper limit on the price-to-sales ratio of 10.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indices, forex, options and commodities.
What did we find?
Topping our list is Cambridge, Ma.-based Biogen (BIIB-Q), a manufacturer of drugs to treat neurodegenerative and autoimmune diseases, such as multiple sclerosis. The stock had strong revenue growth in the last quarter at 22.7 per cent and has the highest RoE on our list at 35.2 per cent.
Celgene (CELG-Q) is an American biotech firm that manufactures drug therapies for cancer and inflammatory disorders. Celgene has the highest quarterly revenue growth on our list at 29.9 per cent. In addition, Celgene reported third quarter results last week which exceeded analyst expectations for both revenue and earnings, in addition to raising guidance for the remainder of the year.
AbbVie (ABBV-N) is a research-based pharmaceutical company which spun out of Abbott Labs in 2011. AbbVie stock has been in a downtrend since the middle of August but has recently reversed sharply. The stock is now up about 14 per cent since the start of November.
Historical Performance
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly re-balancing, the screen described had a 19.7 per cent annualized return compared to 10.5 per cent for the S&P 500.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.