2021 has been a year of positive returns for major U.S. stock indexes after an impressive year of gains despite volatility in 2020. The Dow Jones is up 12%, the S&P 500 is up 13% and the lagging Nasdaq Composite is still up 9% year-to-date. With ongoing chatter about inflation concerns and a potential shift of monetary policy by the Federal Reserve, it’s a good time to focus on undervalued stocks, in particular undervalued biotech stocks.
According to IBIS World, “the major markets for biotechnology products, which include human health and food production, are relatively resistant to economic downturns due to the nondiscretionary characteristics of most end products. However, the industry is extremely reliant on investor sentiment, which can drive revenue volatility.” However, revenue for the industry is expected to rise over these five years from 2021 to 2025.
Another report by Acumen Research and Consulting titled “Biotechnology Market– Global Industry Analysis, Market Size, Opportunities and Forecast, 2020-2027” is optimistic about the future of the biotechnology industry, mentioning that, “the Global Biotechnology Market is expected to grow at a CAGR of around 15.5% from 2020 to 2027 and reach [a] market value of over $850.5 billion by 2027.”
With that in mind here are 4 undervalued biotech stocks that belong on your buy list:
- Sage Therapeutics (NASDAQ:SAGE)
- Innoviva (NASDAQ:INVA)
- Biogen (NASDAQ:BIIB)
- SIGA Technologies (NASDAQ:SIGA)
These biotech stocks combine above-average long-term growth prospects with below-average valuation multiples. The biotechnology industry is at the intersection of two powerful industries, meaning the following undervalued biotech stocks can offer the benefits of investing in healthcare and the benefits of investing in technology.
Undervalued Biotech Stocks: Sage Therapeutics (SAGE)
SAGE stock tumbled 19.3% at the close on June 15, 2021, “after results from a late-stage study raised questions on durability and commercial potential for a new drug for depression.” This disappointing news harmed the biotech sector as “the Nasdaq Biotech Index retreated 1.6%, its biggest drop in over a month.”
Now, this bad news has a silver lining, as the sell-off makes SAGE stock very attractive. 2020 was a pivotal fiscal year for the company, which finally turned a profit after a series of losses over the preceding four years. With remarkable sales growth of 16,123.06% in 2020 to $1.11 billion (compared with just $6.87 million in 2019), all the key financial metrics showed remarkable improvement.
The P/E Ratio (Q1 TTM) of the company is 5.32 and the Price to Book (Q1 MRQ) ratio is 1.71. With a Price to Sales (Q1 TTM) of 3.08 and a Price to Free Cash Flow (Q1 TTM) of 4.96, the stock seems to be significantly undervalued relative to the wider major pharmaceuticals preparation industry.
Given its high financial strength, SAGE stock is an interesting one, but this huge improvement in its financials in 2020 should be monitored to determine if it’s a flash in the pan or a sign of greater things to come.
If you look at some of INVA stocks’ key financial ratios, you’ll get why I call this biotech company undervalued.
A P/E Ratio (Q1 TTM) of 5.61, Price to Sales (Q1 TTM) at 4.2, a Price to Free Cash Flow (Q1 TTM) of 4.46 and Price to Book (Q1 MRQ) at just 2.07.
Yes, all of these ratios are well below their industry averages. This company is financially strong and quite profitable too, although 2019 was a bad year with net losses. Again, the importance should be on more than just one good year of financial performance.
The 5-year trends for key financial metrics such as free cash flow, revenue, and net income all inspire confidence. I’d especially highlight positive free cash flow growth for the past four consecutive years.
In fact with a market capitalization of $882.11 million, this company could very well soon be an acquisition target.
Biogen stock recently had a nice rally as the Food and Drug Administration green lit the company’s drug Aduhelm for treatment of Alzheimer’s disease. But can a stock that is already up almost 60% in 2021 still be undervalued?
The answer is yes. Although I like the financial strength of Biogen’s stock, I like its profitability even more. This is a mature company with attractive, non-excessive revenue growth. The company had a bad fiscal year in 2020, with a significant decline in revenue, but looks set for a rebound in 2021.
The stock has strong fundamentals, a high operating margin of 33.1% in 2020 and a net margin of 29.76% according to MorningStar. And despite the bad year of 2020, BIIB stock shows consistency when it comes to the bottom line, profitability; Biogen has turned a profit every year since 2011.
If we check the financial ratios all of them are significantly lower than the comparable numbers for the biotechnology and drugs industry. Not everything is rosy, as Biogen collaborated with Sage Therapeutics on its aforementioned depression drug.
Still, BIIB stock has plenty of value and any sell-off should be seen as an opportunity.
SIGA Technologies (SIGA)
What’s just as good as an attractive stock price? How about a strong balance sheet and good fundamentals? Luckily, investors don’t have to choose: SIGA stock has all of the above.
This company’s financial strength is high even though it has seen high volatility in financial metrics such as revenue, EBITDA and free cash flow over the past five years. SIGA Technologies now has a very attractive valuation that’s hard to ignore.
Its P/E Ratio (Q1 TTM) is only 8.12. Its Price to Sales (Q1 TTM) is just 4.01. Its Price to Book (Q1 MRQ) is 4.15. And even its Price to Free Cash Flow (Q1 TTM) is lower than the relevant ratio for its industry.
It’s dangerous to focus solely on financial metrics and buy any old stock solely because it appears undervalued. That’s doubly true for biotech stocks, which are very sensitive to clinical trials and drug approvals (or lack thereof).
That being said, SIGA stock has plenty of risks but at the same time has very strong fundamentals now hard to ignore. Take for example its book value per share, which has increased for three consecutive years. To me, SIGA is yet another undervalued stock that could soon become an acquisition target.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.