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Shares of Amgen (NASDAQ:AMGN) have been under pressure recently. I believe the most recent decline presents an opportunity. In order to present the bull case I want to first present the bear case. The Goldman Sachs analyst is the most bearish analyst of the major brokerage firms on Amgen with a sell rating and a $50 price target. These are the assumptions the Goldman analyst makes in arriving at his $50 price target:

  • The analyst uses a discounted cash flow model with a 10% weighted average cost of capital in order to come to his $50 price target. This means that the analyst assumes that an investor in Amgen requires a 10% a year return in order to invest in Amgen. In order to receive a 10% a year return the stock would need to be $50.
  • The analyst assumes that the $3 billion a year that Amgen spends on research and development yields nothing.
  • The analyst assumes that all of Amgen's drugs will have disappointing sales relative to expectations.
  • The analyst assumes that biosimilars will have a larger than expected effect on sales of Amgen's drugs.

This bearish analysis is exactly what makes me bullish on the stock. According to the biggest bear on the stock even if everything goes wrong, at $50 Amgen is priced to return 10% a year. If by some chance sales are not as bad as this analyst believes or the $3 billion a year in research and development yields something the return will be even greater. Making 10% a year is a worst case scenario that I can live with.

Whenever I see a stock that looks attractive I always ask what's the catch. I seek out the bear case because in many cases when a stock looks cheap there is a good reason. In the case of Amgen I believe the company has challenges but that the stock price more than reflects these challenges.

Disclosure: I am long AMGN.