"If you're coasting, you're either losing momentum or else you're headed downhill." -- Joan Welsh
Biotech stocks have been on a huge run over past couple of years and have been one of the top performing sectors throughout the rally. It is a sector that has provided my portfolio with some huge winners over that time frame and an area that I wish in hindsight that I would have been more overweight.
Jim Cramer provided a comprehensive series of pieces on solid momentum stocks that still exist in the market during the holiday weekend. His pick in the biotech sector was Regeneron Pharmaceuticals (REGN), a company experiencing better than 25% annual revenue increases.
I want to look at a couple of biotechs Jim mentioned in the article. Both have had huge runs but still look reasonable given the growth the companies are delivering.
Jazz Pharmaceuticals (JAZZ) is a specialty biopharmaceutical company that focuses on the identification, development and commercialization of pharmaceutical products to meet unmet medical needs. I first called out this biotech name in September 2012 when it was trading at under $50 a share. The stock now goes for $160 a share.
Unfortunately for my portfolio I broke one of the cardinal sins of momentum investing -- Ride your Winners. I took profits a bit too soon on this biotech juggernaut. Jazz should post over 30% year-over-year gains when it reports the last quarter of its fiscal year next week. The consensus is calling for better than 20% gains in FY2014. 50% revenue increases this fiscal year should be followed by 20% to 25% growth in FY2014.
The company has made two acquisitions recently to diversify its product portfolio. Jazz has also been the subject of takeover rumors due to its fast growth, under $10 billion market capitalization and its tax domicile in Ireland. Even with the stock's huge run, JAZZ is still reasonable at below 20x forward earnings given its growth trajectory.
If I do have a biotech position I consider my 'core' biotech stock in my portfolio it would be Gilead Sciences (GILD). Gilead's stock has roughly doubled over the past year but it is hard to find faults with the company's product portfolio. Its HIV franchise continues to drive consistent growth while it has increasing opportunities with new products for Hepatitis C.
Standard & Poor's believes Gilead's new Hepatitis C treatments will reach $2.4 billion in revenues in 2014 on the march to eventual peak sales of $8 billion annually. The consensus is calling for 70% to 80% growth in earnings this year on the back of almost 50% revenue growth. Earnings are projected to increase another 30% to 35% in FY2015. An investor is paying less than 15x FY2015's projected earnings for a company experiencing explosive growth.
Although biotech has produced stellar returns for investors over the past few years, momentum looks set to continue given the revenue and earnings trajectory of some of the big names in the space.