When investors are looking for high growth and reasonable valuations in the biotech space, Celgene Corporation (NASDAQ:CELG) is one of the first companies to come to mind. However, October was not kind to the CELG stock price. Shares fell more than 35% from the highs. After a slow yet steady bounce, is now the time to buy Celgene?
In fact, it might just be.
Decaying sentiment and negative analyst commentary wore on the CELG stock price. But it wasn’t until mid-October until things really went sour.
Celgene pulled the plug on two treatments for Crohn’s disease. It put a halt to one Phase 3 study and one Phase 2 study, also opting not to initiate a Phase 3 test on the latter. It also announced a $300-$500 million charge as a result. While the 10% fall hurt, it was outdone by the 16% tumble it took Oct. 26 after earnings.
Are the fundamentals for Celgene perfect? Of course not. There’s a reason shares fell more than 30% inside of a month. Disappointing earnings and poor guidance didn’t help. Concerns over drug pricing while ending trials and taking charges for pipeline drugs investors were counting on only add salt to the wound.
But let’s not forget what Celgene has built over the years. This isn’t a fly-by-night profitless biotech company. In fact, this $84-billion market cap biotech stud is quite profitable and has handsome growth to boot. While CELG stock trades at 25 times trailing earnings — not necessarily cheap — its forward price-to-earnings ratio of just 12 is ridiculously low. Especially considering its growth.
Analysts expect earnings per share of $7.33 this year, up more than 23% year-over-year. It’s not a fluke year, though, as analysts expect further growth of almost 20% next year. Sales growth of 15.6% this year does slow to 14.4% in 2018, but it’s still an impressive number.
Near 20% earnings growth on 15% sales growth shows strengthening margins and improving profitability. More impressive though is the valuation. Trading at just 12 times those forward estimates is incredibly cheap for a quality company like Celgene and robust growth.
To put this valuation in perspective, take the trailing valuation of 25 times earnings. If Celgene were to earn what analysts predict for 2018 — $8.74 per share — CELG stock would trade at a whopping $218 by fiscal year-end should the 25 times earnings apply.
Even if that trailing price-to-earnings (P/E) ratio were to plummet down to 15, we’re still talking about a $131 stock. That’s almost 25% above current levels!
I am really kicking myself on CELG stock at the moment. As shares were plunging on Oct. 26, I tweeted that long-term support near $95 may come into play. However, I said I was hesitant to “stick my toes in” and ultimately missed my chance as CELG stock only briefly hung around these levels.
Still, with the stock closing around $106 Tuesday, we have a positive development. The CELG stock price has been trending higher since its late-October lows. Bouncing off steady support, shares are now back above the 21-day and 50-day moving averages. In fact, the 21-day is now above the 50-day as well, another bullish development.
But more importantly, CELG stock is breaking through its downward channel of resistance. The dark gray line on the chart has been an overhang on CELG stock for several months. Although I didn’t pull the trigger at $95, this move past resistance and above key moving averages has me thinking of a long position, particularly from a long-term investment perspective.
Bullish traders should consider buying on this break over $106. Bullish investors should consider CELG stock a buy now and add at support at $95. Even near current levels around $109, short-term investors could consider a long position. Either look for a further breakout over $110, or a pullback to prior resistance. In this case, that will be a drop toward $105 to $106.
However, should you buy Gilead Sciences, Inc. (NASDAQ:GILD) instead? A recent analyst said he preferred Baxter International Inc (NYSE:BAX) and Abbott Laboratories (NYSE:ABT) over Johnson & Johnson (NYSE:JNJ).
Are any of these better than Celgene? It depends on the investor, but the fundamentals and technicals line up for Celgene at the moment. That makes it a buy to me. Still, these are all quality companies, and a basket approach may work well, too.