Two Undervalued Healthcare Stocks

 

Algorithms Defined

According to Wikipedia, an algorithm is a step-by-step procedure for calculations. Algorithms are used for calculation, data processing and automated reasoning.

For example, the objective of a simple algorithm is to find the largest number in a random list of numbers. The solution necessarily requires looking at every number in the list, but only once at each. From this follows the algorithm, which can be stated as:

• Assume the first number is largest.
• Look at each of the remaining numbers in the list one at a time, and if the number is larger than the largest number so far, assume it is the largest.
• The last number chosen will be the largest in the list when the process is complete.

Known as a loop when programmed into the computer, this example and many, many others can be expanded into complicated programming instructions for buying and selling stocks. Called algorithmic or Algo trading, these computer instructions, run on supercomputers, are designed to follow the price action of stocks or electronic news items that affect the movement of stocks.

For instance, if Wal-Mart reports sales and earnings, a large number of preprogrammed supercomputers will “read” the report and decide whether to buy or sell Wal-Mart, and whether to buy or sell a large number, or basket, of stocks based on what is contained in the report. Supercomputers will devour the report and buy and sell within nanoseconds. The human brain does not operate in nanoseconds, because one nanosecond is equal to one-billionth of a second!

Algo trading is widely used by investment banks, pension funds, mutual funds and hedge funds. According to the Aite Group, located in Boston, Algo trading reached a peak of 73% of all market trading in 2009 and fell back to 50% of trading in 2012. After an Algo-induced trade caused the “flash crash” on May 6, 2010, new trade requirements were enacted to prevent future crashes.

Algos Lose, Value Investors Win

Algo trading is now over-saturated. Too many super computers using the same programming models are reading the same news and executing the same buy and sell trades. The excessive buying and selling is sending some stocks lower than their intrinsic value while sending other stocks to dizzying heights.

The advantage for value investors is that, if you know how much a stock is truly worth, you can buy at advantageous prices and sell (usually after a short period of time) when your stock reaches a substantially higher price. Value investors have been doing this for decades. Value investing consistently outperforms hedge funds, growth funds, and the stock market indexes.

Intrinsic Value

In my opinion, the only way to avoid using systems that can become overused and ineffective, like Algo trading, is to evaluate the fundamental balance sheet and income statement data for a company to determine the true fair value of each and every company. Finding the true intrinsic value of a company, though, is not easy.

I spent a year, full time, early in my career, programming Benjamin Graham’s evaluation methodologies. I believe my results are the best in the business—they allow me to predict, within reason, when a stock is undervalued and should be purchased, and calculate a sell price that will provide a nice profit.

Research services, including Standard & Poor’s and Value Line, can provide reliable intrinsic value estimates. But few investors today rely on the intrinsic value of a company as a basis for their investment decision. Because many investors are abandoning the “old fashioned” idea of buying and selling stocks based on fundamental evaluations, the value investing system is working better than ever.

Few investors are using the system that is producing the most profitable results!

Personal note: I just received a call from my son Brad. The conversation went something like this. Brad: “Hey Dad”; me: “Hi Brad, how are you?” Brad: “Well, I’ve been better. I’m in the back of an ambulance headed for the hospital. I fell while rock climbing in Zion and broke my leg and hurt my hand.”

Well that’s not a phone call that a parent wants to receive. Brad and the Park Ranger, who was in the ambulance with him, then gave me information so I could contact the hospital where they were headed. Looks like I’ll be heading out to Utah as soon as I can find out more information about his condition and hospital stay. The life of the parent of an adventurous 24 year-old can be challenging at times!

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Two healthcare stocks are currently undervalued and sell at bargain prices. The companies operate in the biotechnology and prescription and generic drug sectors, which are attracting a lot of investor attention these days.

Questcor Pharmaceuticals (QCOR: Current Price 62.29; Minimum Sell Price 113.25) Questcor is a specialty pharmaceutical company providing H.P. Acthar Gel (Acthar), a prescription drug for autoimmune disorders and other ailments. Acthar is an injectable drug approved for the treatment of certain inflammatory disorders, including nephrotic syndrome and exacerbations associated with multiple sclerosis (MS).

Acthar is a naturally occurring, highly-purified preparation of adrenal corticotropin hormone. Acthar is specially formulated to provide prolonged release after intramuscular or subcutaneous injection. The drug works by stimulating the adrenal cortex to secrete endogenous corticosteroids and other androgenic substances. Acthar is approved for 19 different indications.

Questcor is in Phase II trials to gain FDA approval to sell Acthar as a treatment for ALS (amyotrophic lateral sclerosis or Lou Gehrig’s disease).

Sales and EPS soared more than 50% during the last 12 months. Sales will increase 30% during the next 12 months ending 9/30/14. EPS will jump 34% to 5.35. Questcor shares are a bargain at 15.6 times current EPS. The company’s balance sheet includes minimal debt, but shares are high risk because of the speculative nature of the company’s biotechnology business. I expect shares to achieve my Min Sell Price of 113.25 within one to two years.

Valeant Pharmaceuticals International (VRX: Current Price 105.16; Minimum Sell Price 165.48)

Based in Mississauga, near Toronto, Valeant is an international specialty pharmaceutical company that discovers, develops, manufactures and markets a broad range of pharmaceutical products.

Valeant has developed drugs in almost all areas of medicine with a slightly higher emphasis on neurology and dermatology products. Its drugs include prescription and generic brands; in all about 900 pharmaceutical products are marketed globally.

The 2010 merger with Biovail tripled Valeant’s sales. The marriage has produced better than expected results and includes a vast array of products and marketing capabilities throughout the world.

Management is aggressively acquiring small companies with the potential to immediately add earnings (a process commonly called accretive). Valeant has acquired 50 companies during the past four years. During the past 12 months, Valeant purchased 12 companies, highlighted by the acquisition of Medicis Pharmaceutical for $2.6 billion and Bausch & Lomb for $8.7 billion. The purchases are expected to be immediately accretive to Valeant’s earnings.

Sales and EPS soared 48% and 26% respectively during the last 12 months. Sales will surge 54% during the next 12 months ending 9/30/14. Earnings per share will climb 42% to 7.57. The price to earnings ratio of 19.8 is a bargain, even though the company pays no dividend. The balance sheet is solid, although debt is a tad high. VRX is high risk because of its high volatility and the company’s short history since its merger with Biovail.

I will continue to follow QCOR and VRX, as well as many other undervalued, high-quality companies in Cabot Benjamin Graham Value Investor. If you subscribe now, you will receive my November Special Feature publication on Thursday, November 14!

Until next time, be kind and friendly to everyone you meet.

Sincerely,

J.Royden Ward
Chief Analyst, Benjamin Graham Value Investor

Editor's Note: You can find additional high-performing stocks selling at bargain prices in the Cabot Benjamin Graham Value Investor. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 275 stocks.

Click here to get started today!


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