2 Juggernauts For Growth And Stability In A Volatile Market
It has been a rough start to 2015 for investors. January reprised the downward bias it had to start 2014 and major indices were down two to four percent for the month. Global worries abound. Greece elected a far left government that is pushing the country into direct confrontation with the “troika” that has loaned the country more than $250 billion. This is putting the Euro and EU under duress.
Oil prices continued to fall during the month putting additional pressure on the energy sector, triggering huge reductions in capital expenditure plans across the oil and gas industry and sending the Russian economy into recession. The plunge in crude is also impacting two of our country’s largest trading partners: Canada and Mexico.
The strength of the dollar is taking a big toll on earnings throughout the S&P 500. Companies as varied as Pfizer (NYSE: PFE), Du Pont (NYSE: DD) and Microsoft (NASDAQ: MSFT) has delivered quarterly results that have seen substantial currency hits to profits.
Finally, global growth is tepid at best. The world will be lucky to get two percent growth from Europe or Japan in 2015 and China just posted its slowest growth in nearly 25 years. Brazil looks set to join Russia in recession.
The market does not feel like a bargain right now at approximately 18 times trailing earnings even if interest rates are at rock bottom and the United States is the best house in a bad neighborhood. So what should investors to do right now in this increasingly volatile market?
I think embracing large cap growth companies with visible earnings streams and reasonable valuations are the way to go right now. I particularly like the biotech and biopharma sectors here. The area outperformed the overall market and actually posted a gain in January. These areas have less currency exposure than most American multinationals and are less impacted by slowing global growth as well.
More importantly, the sector is one of the few that is consistently and widely exceeding expectations this earnings season. Celgene (NASDAQ: CELG) beat both the top and bottom line consensus last week and Biogen Idec (NASDAQ: BIIB) blew away expectations last Thursday and the shares rose more than 10% on the week as the result. Both biotech stocks are a core part of my large cap growth portfolio.
Biotech juggernaut Gilead Sciences (NASDAQ: GILD), which is the largest position in this portfolio reports this week. I expect solid results but the company could issue conservative guidance for FY2015 and I plan to add some additional shares if the stock pulls back on guidance.
The company is a growth star thanks to its blockbuster hepatitis C products Sovaldi/Harvoni. These compounds should post total sales of around $12 billion in FY2014 after being rolled out last year, putting up the biggest launch numbers of any new drugs in history during their first year on the market. These compounds should remain some of the best selling drugs in the world in the years to come.
Earnings in FY2014 should come in at just under $8 a share, not bad considering Gilead made just over $2.00 a share in FY2013. Growth will slow in FY2015 from this year’s breakneck pace. Worldwide Sovaldi/Harvoni sales should come in at north of $14 billion this fiscal year as they get distributed in new markets counterbalanced by new competition from AbbVie (NYSE: ABBV) in the hepatitis C space.
I spent some time with an investment bank analyst in New York City last week who covers this space closely and has a price target north of $140 a share on Gilead. It was enlightening to get the detailed lowdown on the limitations on AbbVie’s Viekera Pak that should keep it to under 20% of the worldwide hepatitis C market.
Gilead should post earnings of at least $9.50 a share in FY2015 on revenue growth in the high teens. Gilead continues to dominate the HIV space as well and has a deep pipeline of compounds in late stage trials. The company should throw off $10 billion to $15 billion in free cash flow this fiscal year of which approximately $5 billion should be used to buy back stock. This is a good use for increasing cash flow given the stock trades at just 11 times forward earnings in a market with multiple of approximately 16 times forward earnings.
The last of the so called “four horsemen of biotech”, Regeneron Pharmaceuticals (NASDAQ: REGN) reports next week. The company has had a stellar year and earnings are tracking to better than a 150% year-over-year gain in FY2014. However, earnings growth will moderate to a projected 20% increase in FY2015 and the stock is a bit pricey for me at over 35 times forward earnings.
I prefer Jazz Pharmaceuticals (NASDAQ: JAZZ). The off the radar name has a market capitalization just north of $10 billion and the stock has more than tripled since I identified it on SeekingAlpha back in August 2012. However, the company continues to deliver solid growth in earnings and revenues. Jazz should deliver another year of at least 20% revenue and earnings gains in FY2015 and sells in line with the overall market multiple despite superior growth prospects. I would not be surprised either if the company finds itself as a buyout target by a larger pharma player at some point in the future.
Although this article was focused on the large cap biotech space, if we are going to talk about attractive values in the large cap growth arena; one has to give a shout out to tech giant Apple (NASDAQ: AAPL). The company just reported the most profitable quarter in S&P history and crushed the forecasts of every analysts. Amazingly the stock is still cheap despite the shares recent rally.
Apple is the easiest single stock decision in the market right now. For a deeper look at this growth juggernaut be sure to check out some of my most recent articles on Apple here and here. It is easy to see why Apple was one of the inaugural picks of the just launched Blue Chip Gems portfolio. Click here for more about Blue Chip Gems, a new investment advisory service for investors looking for stocks with growth and stability.