Some financial people do not really look at all the good things drug companies do. All the healing. Instead, they focus on the destruction: The creative destruction that happens when new replaces the old.
Think of all the popular brand names of the last decade: Rogaine, Plavix, Cymbalta, Oxycontin, Celebrex. It's a long list of exclusive money-making home runs, now generic also-rans starring with a different label at a pharmacy shelf near you.
And getting longer this year. FiercePharma does a pretty good job of keeping an eye on it.
So while lots of analysts like to pay attention to the pipelines full of miracle drugs of tomorrow, some companies do quite well with the miracle drugs of yesterday. The generics.
Let's look at one, Actavis (ACT).
The past 15 months have been a dog fight for supremacy among three sectors: pharmaceutical, biotech, and internet. And at the start of the New Year, pharmaceuticals emerged at the top of my leader board.
Data on all tables from Best Stocks Now App
One pharmaceutical that has performed and continues to perform quite well is Actavis. It has been a Gunderson Best Stock Now for quite some time and continues to be.
Headquartered in New Jersey, ACT is a $31 billion large cap company that develops, manufactures, and distributes generic and branded drugs for hypertension, elevated cholesterol, contraception, and pain. They're currently even working on a generic NuvaRing.
So let's talk about what has made ACT a Gunderson Best Stock Now.
First, we start with performance.
Over the past five years, ACT has delivered nearly 49% per year to investors. The market has only delivered 15.6% during the same time.
Over the last three years, ACT has clobbered the averages again, delivering almost 51% while the market averaged only 13.1%.
And during this past year when the pharmaceutical stocks have had jumbo performance, ACT is up nearly 106%.
ACT is currently one of the top-performing stocks in the entire market, coming in with both performance and momentum grades of 'A'.
We are not done yet.
The next filter that ACT has to pass through is technical. A chart is a great way of capturing and summarizing everything we know about a stock.
ACT had been going sideways for a period of about ten weeks or so up until just this past week, when I noticed the stock breaking-out to the upside! And I'll be watching to see just how far this ascent can carry it because I do not know.
We manage risk, not predict the future. There's a big difference that every successful investor knows. Every gambler does not.
But while I'm watching, let's use valuation as a gauge to come up with a five-year target price. Six and twelve-month target prices are too risky. If we're going to use five-year growth rates, then let's use five-year target prices - that's my mantra.
When I take ACT's next year's earnings estimates of $12.83 and carry them out applying a five-year growth rate of 22% per year, I come up with a PEG ratio of 0.59. The PEG ratio compares the growth rate with the forward P/E, and anything under 1 is quite favorable in the growth investing world.
Furthermore, when I take those earnings of $12.83, grow them by 22% per year, and then apply a multiple that I think is appropriate, I come up with a five-year target stock price north of $300!
ACT has 89% upside potential. I like stocks that have at least 80% or more. ACT easily qualifies under my valuation requirements and comes in with a Gunderson Value Grade of 'B+'.
Now let's rank performance and valuation together. I'm not a value nor momentum investor. I'm both! I combine value, performance, and momentum for finding stocks that are underpriced. This may be a tall order, but it really narrows down the entire field!
But it's a big field. And we only need to find 25 or so good ones.
Out of 3,773 stocks in my Best Stocks Now! app, ACT currently comes in at #17. And it is also a stock that I have a large position in in my conservative growth accounts.
Please follow me on Twitter or at my website for a change in opinion of the stock.