From an overall perspective, biotech stocks have enjoyed respectable gains this year. The sector exchange-traded fund SPDR S&P Biotech ETF (NYSEARCA:XBI) is up double digits since January’s opening session. That said, the market movement has been anything but steady, with several key players suffering disappointing performances.
But in the bigger picture, investors have an opportunity to use this weakness in biotech stocks to their advantage. In my opinion, biotech firms represent ideal contrarian opportunities due to their often binary nature. When a company hits or exceeds performance benchmarks, shares launch into low-earth orbit. However, failure often results in excessive selloffs that can endure for lengthy periods.
Understanding this dynamic, sector weakness is an ideal time to consider well-capitalized and fundamentally sound biotech stocks. Investors punish health-related companies with unusual vigor, even though their underlying financial situation may not have changed.
But don’t forget some of the smaller names in this investment category. Many of them offer underappreciated therapies that could take off once the right conditions are met.
So without further ado, here are eight undervalued biotech stocks to watch:
Undervalued Biotech Stocks to Watch: AbbVie (ABBV)
If I could describe AbbVie (NYSE:ABBV) in two words, I would use the terms revenue and earnings. In the trailing three-year period, ABBV generated 12.4% top-line growth, which is better than 72% of the competition. Furthermore, the company has nearly 43% EBITDA growth, which places it in the top ten among biotech stocks.
Much of this financial success comes from AbbVie’s standout drug, Humira. Doctors prescribe Humira to address pain and inflammation problems resultant from a variety of autoimmune diseases. These include rheumatoid arthritis, chronic plaque psoriasis and Crohn’s disease.
Beyond helping countless patients ease their suffering, Humira brings a ton of green to the table. Between 2011 through 2017, Humira revenues jumped from $7.9 billion to $18.4 billion. Annually, this translates to an impressive 15% growth rate.
The markets, though, haven’t been too hot on ABBV stock. Year-to-date, shares have only gained 4.6%. It’s also down double digits since mid-March, providing opportunists with a blue-chip bargain.
Undervalued Biotech Stocks to Watch: Gilead Sciences (GILD)
Several top biotech stocks haven’t lived up to expectations this year, and Gilead Sciences (NASDAQ:GILD) is one of them. Against January’s opener, GILD stock has only gained 2.5%, which is incredibly pedestrian. Even worse, it was having a decent go, putting in a double-digit performance until just recently.
So why the fallout? GILD was on the receiving end of two negative factors. First, while the company reported a solid second-quarter earnings report, investors noted that its hepatitis C drug revenues slipped 66% year-over-year.
Next, it incurred internal drama when the biotech giant announced that CEO John Milligan will step down at year’s end. Taken as a whole, the markets didn’t appreciate the news, and decided to sell off GILD stock.
Although the bearishness is understandable, new investors should keep a close eye on GILD. The company still levers impressive financials, particularly with their excellent profitability margins. Also, it has a favorable cash-to-debt ratio relative to its peers.
Undervalued Biotech Stocks to Watch: Celgene (CELG)
Even compared to the laggards among biotech stocks, Celgene (NASDAQ:CELG) suffers a distinctly poor outing. On a year-to-date basis, CELG stock has slipped more than 14%. Based on its current position, the company essentially hasn’t moved since the middle of spring.
Actually, as my InvestorPlace colleague Aaron Levitt noted, Celgene’s problems started in the fall. Levitt wrote:
“The firm’s first failure came from the stoppage of Phase 3 clinical trials for its REVOLVE drug to treat Crohn’s disease. Strike two came when Celgene was forced to reduced forward earnings forecasts based on that stoppage and the fact that REVOLVE won’t be coming to market anytime soon.”
That said, Levitt insists that you look at the longer-term picture, and I agree. For one thing, CELG is fundamentally undervalued, trading at 10.4-times forward earnings. Additionally, the company enjoys very strong profitability margins, as well as double-digit revenue and EBITDA growth.
Undervalued Biotech Stocks to Watch: Jazz Pharmaceuticals (JAZZ)
At first glance, Jazz Pharmaceuticals (NASDAQ:JAZZ) doesn’t appear as a candidate for undervalued biotech stocks. After all, JAZZ shares have lit up the markets, gaining an impressive 28.6% YTD. That puts it in a completely opposite category relative to so many other sector players.
But look a little deeper and you’ll note that Jazz Pharmaceuticals isn’t what you call an industry titan. At the present juncture, the company has a market capitalization of $10.5 billion. Yet it has some impressive financial metrics. Standouts include its operating and net margins, both of which are inside the top 10% of global biotech stocks.
Also, I’m digging the fact that its trailing three-year revenue and EBITDA growth are in double-digit territory. And while its cash-to-debt ratio isn’t the most favorable I’ve seen in this sector, considering its relative upstart status, I view this as a sign of management’s fiscal discipline.
Finally, JAZZ stock trades at 13.4-times forward earnings, which suggests it has upside remaining.
Undervalued Biotech Stocks to Watch: Exelixis (EXEL)
I have no other way to describe it. Exelixis (NASDAQ:EXEL) is having a catastrophically bad year. Since January’s opening price, EXEL stock has hemorrhaged nearly 37% of market value. The only good news here is that it appears shares have hit a bottom. But is that reason enough to take a shot?
Let’s recap how EXEL stock got into this mess. Shares dipped badly following its Q4 earnings report, which was in line with profitability estimates and beat revenue expectations. However, the company’s $120.1 million in sales sharply contrasted with the prior Q3 haul of $152.5 million.
Later, the company produced two strong earnings results in Q1 and Q2, which helped stabilize EXEL stock. Nevertheless, shares haven’t gone up meaningfully. In fact, over the last several days, the opposite is true.
I believe, though, this is a case where the markets are overly pessimistic. Exelixis, which specializes in tumor and cancer treatments, levers a viable drug pipeline. Moreover, it has strong financials, a highlight being a very favorable cash-to-debt ratio.
Undervalued Biotech Stocks to Watch: Alnylam Pharmaceuticals (ALNY)
All companies eventually face disappointing market performances. This is especially true for biotech stocks. But I’ll argue that Alnylam Pharmaceuticals (NASDAQ:ALNY) has one of the more depresing tales of volatility.
Straight off the bat, let me just say that analysts have largely treated ALNY stock as a speculative investment. Nevertheless, management has been banking on its key drug patisiran, which is now named Onpattro. Developed as a treatment for a rare hereditary disease that damages internal organs, Alnylam sought FDA approval for Onpattro.
They got it just a few weeks ago. Unfortunately, the news arrived along with some granular conditions, including that Alnylam cannot mention cardiac benefits associated with Onpattro. To do so would require further clinical trials, which could take years.
But as The Motley Fool’s Jim Crumly argued, the bearishness may be overplayed. Onpattro is an effective drug, and compares favorably to the competition. The markets may just need some extra time to properly digest the news.
Undervalued Biotech Stocks to Watch: Geron (GERN)
If you judged Geron (NASDAQ:GERN) based on market performance alone, you wouldn’t come to the conclusion that it’s undervalued. Not when shares have skyrocketed 113% YTD, making GERN the best performing investment on this list of biotech stocks.
However, Geron is a small-cap company — it only has a market cap of $720 million — with significant upside potential. Geron specializes in oncology, and it has partnered with Johnson & Johnson (NYSE:JNJ) for its only drug imetelstat. The treatment, which is aimed at hematologic myeloid malignancies, shows great promise; hence, the partnership with JNJ.
That said, as a lone-drug company, Geron’s fate hinges on imetelstat’s next clinical trial, which will come up shortly. A positive result could see an expanded partnership, or a JNJ buyout. On the flipside, a negative result could shutter Geron’s doors.
Ultimately, GERN stock is a binary opportunity, but one that is quite compelling for the speculator.
Undervalued Biotech Stocks to Watch: Kamada (KMDA)
Technically, I can’t call Kamada (NASDAQ:KMDA) undervalued. On a YTD basis, KMDA stock has gained 12.4%, making it one of the better biotech stocks on this list.
I also can’t say that the company is fundamentally undervalued. KMDA trades at 18-times trailing earnings, and a whopping 39-times forward earnings. So why am I talking about this drug maker?
Simply put, KMDA stock suffers from lack of interest. At the time of this writing, the volume readout indicated 5,449 shares. Bluntly stated, that’s scary low. Much of the bearishness stems from Kamada’s failure to answer FDA concerns about its Inhaled Alpha-1 Antitrypsin therapy. This played into long-held skepticism regarding an inhaled therapy for Alpha-1 Antitrypsin Deficiency.
However, its core fundamentals deserve better than its current awful lack of attention. Typical for Israeli companies, Kamada has very little debt relative to its cash position. It also features excellent profitability margins, and double-digit revenue growth.
Of course, KMDA could turn into a “zombie” stock, so I don’t rank it very highly. Still, this is worth putting on your watch list as it could surprise down the road.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.