Can you guess the top performing sector in the S&P 500 year-to-date?
According to Yardeni Research, it’s health care — up 23% through May 23. And two of the best-performing industries within healthcare? Biotechnology — up 41% — and pharmaceuticals — up 22%.
In fact, it seems like many of the big names in these two industries can do no wrong. With that in mind, let’s take a look at what stock to buy and sell in each industry.
Pharma: Buy Zoetis
On the buy side of things for pharma, I’m going with Zoetis (ZTS), Pfizer’s (PFE) former animal health division, which was partially spun off early in 2013.
It might seem like a strange pick given all the other possibilities, but I see real potential for this company. Zoetis is up 27% from its offering price, with most of the return coming in the first day of trading. In fact, Pfizer has decided to spin off the its remaining 80% interest in Zoetis via an exchange offer sooner rather than later.
Why do I like Zoetis? Well, because so many people like animals. My wife and I, for one, own six cats — all rescues off the street. We keep these animals fully aware of the cost of care including, not surprisingly, vet bills … and millions of people in the U.S. do the same.
No wonder things seemed to be going smoothly for Zoetis in its first quarterly report. On a constant currency basis, its livestock segment saw revenue increase 3% year-over-year while its companion animal segment enjoyed an 8% increase. Revenues increased in all four geographic regions, with the U.S. leading the way.
The only negative in its Q1 report was the Canada/Latin America (CLAR) unit, which saw revenues in its companion animal business decline 5% year-over-year. Still, overall, CLAR still managed a 4% increase in revenue.
To top things off, the company’s dividend is currently 26 cents per share annually — a payout ratio of just 19%. Pfizer’s is 43%. Sometime before the year is out, I bet Zoetis will double its dividend. I also wouldn’t be surprised if it made a decent-sized acquisition once it finishes up the exchange process in June.
Buy on any weakness below $30.
Pharma: Sell Aegerion Pharmaceuticals
Juxtapid is a recently approved drug manufactured by Aegerion Pharmaceuticals (AEGR) and used to treat a rare disorder known as homozygous familial hypercholesterolemia (HoFH). Because it’s so rare, the annual cost for Juxtapid isn’t cheap at around $295,000 — the price of a nice home in many communities.
On May 16, AEGR shares shot up 31% on the news the annual cost had risen $60,000 over its original estimate. Investors had dollar signs in their eyes imagining the billion-dollar potential of its newly approved drug. In one day of trading, Aegerion’s market cap increased by $424 million, while in the span of 18 months it’s risen almost five-fold.
And for what?
Aegerion’s first quarter generated $1.2 million in revenue and an $18 million loss from operations. Clearly, like many rising stars, investors are willing to forego the usual due diligence. While management talk confidently about the 5,000 or so patients in Juxtapid’s target market, they fail to mention that Sanofi (SNY) has a similar drug in Kynamro that costs only $176,000 per year and doesn’t have the same risk of liver toxicity.
Plus, with the stock stock gaining 330% over the past 52 weeks on nothing but conjecture, you have to conclude that anyone investing at this point in the company’s history is speculating and nothing more. That’s fine, but don’t complain when it comes back down earth sometime in the near future.
Biotech: Buy Jazz Pharmaceuticals
Jazz Pharmaceuticals (JAZZ) hit a 52-week high on earlier in the week. Its biggest drug is Xyrem, which is used for the treatment of narcolepsy. In its first quarter, Xyrem saw revenues increase 60% to become 60% of its overall revenue. The second biggest contributor to its sales was Erwinaze, with revenue of $41.8 million.
Jazz’s first quarter was so strong it raised its 2013 guidance. Plus, with a PEG ratio of 0.53, its share price appears reasonable. Forget high flyers like Aegerion that don’t make any money; buy something that’s not hemorrhaging cash instead.
Biotech: Sell MannKind
I personally don’t understand investors who like betting on companies that lose money. Sure, I understand that the biotech business is all about research, development and a whole lot of patience. And sure, MannKind (MNKD ) has an insulin drug Afrezza that’s in Phase 3 trials, which are expected to be completed by the end of June.
But we’re talking about a company that’s generated just $3.2 million in revenue in the last 22 years while losing $2.1 billion (about $100 million per year) in the quest for the perfect drug.
Plus, its stock is up 185% year-to-date in anticipation of a product getting FDA approval. The company’s founder believes it could be one of the most important medical products in the history of medicine. That’s some potential to live up to.
I wouldn’t own this stock if someone had a gun to my head … nor should you.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.