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What are we looking for?
The past month's market volatility has shaved a significant chunk of value off shares in many sectors. After years of outperformance, the U.S. pharmaceutical industry has been hit hard with the S&P pharmaceuticals select industry index down 8.3 per cent since June 30. With more than 10 years of broader market outperformance, this industry appears ripe for some bargain hunting for long-term investors.

The screen
We will be using Recognia Strategy Builder to search for U.S. pharmaceutical stocks that appear well valued after their recent decline.

We begin by setting a minimum market capitalization threshold of $1-billion (U.S.) to focus on larger, more established companies in the sector. Next, we will look for companies trading at reasonable valuations by selecting only companies with a forward price-to-earnings ratio of less than 20.

Finally, in order to focus on stocks that have been hit hard in the past month, we will select only companies trading at 10 per cent or more off their 52-week highs.

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, indexes, forex, options and commodities.

What did we find?
Gilead Sciences Inc. concentrates on anti-viral drugs to treat patients with HIV, hepatitis and influenza. Up 18 per cent year-to-date, Gilead was adversely affected by recent market volatility and is now trading 11.4 per cent off its 52-week high. With a forward P/E of just 10.3, this stock is looking attractively valued compared with its peers.

AbbVie Inc. is a research-based pharmaceutical company that was spun out of Abbott Labs in 2011. The company is now trading 17.7 per cent off its 52-week high set on July 21. On July 24, AbbVie issued second-quarter results that beat expectations on earnings, but missed slightly on revenue.

Biogen NV is a manufacturer of drugs to treat neurodegenerative and autoimmune diseases such as multiple sclerosis. The stock is now off 34.1 per cent from its 52-week high, giving it a fairly reasonable forward P/E of 19.

Historical performance
Recognia Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 27-per-cent annualized return compared to 9.1 per cent for the Dow Jones industrial average and 11.7 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.

Hard-hit U.S. pharma stocks