Growth investing has changed a lot since I started in the 80s, especially in terms of which sectors are driving earnings and revenue growth. Back then, one of the core parts of any growth investors' portfolio included fast-growing biotech and drug stocks, such as Genentech (DNA) or Amgen (AMGN) that were consistently provided yearly revenue and earnings growth of over 20%. Now this sector seems to be lacking of these sorts of profitable, fast-growing opportunities.
It seems there are only two sorts of stocks in these sectors. On one end you have the huge drug firms, Including Pfizer (PFE) and Eli Lilly (LLY), whose blockbuster drugs are losing patent protection leaving their pipelines somewhat bare. Plus, they are engaged in myriad restricting efforts. They only attract value and dividend investors drawn to their low valuations and high dividends. On the other end of the spectrum is a surfeit of small biotech stocks that have some interesting drugs in phase trials, but are burning through cash and whose profits, if any, are far out in the future. These stocks are bought by speculative players who are hoping to hit home runs and willing to have plenty of strikeouts along the way.
Although much harder to find, profitable firms with explosive revenue growth are still out there. Here are two I like that that have very reasonable valuations given their growth arcs.
Jazz Pharmaceuticals (JAZZ) is a specialty biopharmaceutical company. It gets 70% of its current revenues from its blockbuster drug Xyrem, which is used to treat narcolepsy.
Four reasons JAZZ is a solid growth play at $48 a share:
- Earnings are rising at a rapid clip. JAZZ earned $3.52 in fiscal 2011 but is on track for more than $4.75 a share in profit in fiscal 2012. Analysts currently expect almost $5.75 a share of earnings per share (EPS) in fiscal 2013.
- Revenues are exploding. The company should experience better than a 125% sales increase in fiscal 2012 and analysts project almost 40% revenue growth in fiscal 2013. It has a minuscule five-year projected PEG (.34) as well.
- The stock is selling at just 8.5x forward earnings, a discount to its five-year average of 12.5x.
- Consensus earnings estimates for both fiscal 2012 and fiscal 2013 have gone up nicely over the last two months and the median price target on JAZZ is $67 a share, which is substantially above the current stock price.
Questcor Pharmaceuticals (QCOR) is a biopharmaceutical company that provides prescription drugs for the treatment of multiple sclerosis, nephrotic syndrome and infantile spasms indications.
Four reasons QCOR still has upside from $50 a share:
- Questcor has a similar revenue growth profile to Jazz Pharmaceuticals. Sales growth should come in at around 115% in fiscal 2012 and analysts expect over 35% sales growth in fiscal 2013. The stock sports a small five year projected PEG (.47).
- The company has beat earnings estimates easily each of the last six quarters. The average beat over consensus for the last four quarters has averaged 20%.
- Consensus earnings estimates for fiscal 2012 and fiscal 2013 have moved up more than 20% over the last three months.
- Given its explosive growth, 12x forward earnings is a cheap entry point for this stock.