The stock market has been nothing short of volatile since we started selling off in July. Since then, extreme price movement has been the norm. That, however, is not the case with some medical stocks with very strong fundamentals. Some of the fastest growing medical stocks have been trending higher barely suffering any damage from the sell off and volatile action of the overall market.
When trying to find great investments that have huge price appreciation potential, there are seven characteristics I look for, which I have detailed in previous articles over the past month. These seven characteristics can be found in all of history's greatest stocks going back over the past 130 years. Let's take a look at the fundamentals of these four medical stocks that have been outperforming the market Relative Strength-wise the past two months.
Jazz Pharmaceuticals (JAZZ) is a Palo Alto, CA developer of specialty drugs to treat cataplexy, narcolepsy, and obsessive compulsive/social anxiety disorder. Clearly demand is strong for JAZZ's line of ethical drugs as current growth is huge. EPS year-over-year quarter-to-quarter growth the past eight months has been huge with gains of 106%, 143%, 153%, 275%, 583%, 91%, 228%, and 193%. During that same time, sales growth has come in at 74%, 95%, 59%, 9%, 45%, 39%, 45%, and 59%. That current growth is beyond impressive and the future looks bright with EPS growth estimates for 2011 and 2012 at 112% and 32% respectively.
The company has a debt-to-shareholder equity ratio of 81%, but with the current growth in EPS and sales, a P/E ratio of 17, and a cash flow of $1.55, this number isn't that detrimental, especially considering 14.7% of profits go into research and development and management still owns 27% of the shares outstanding.
The growth in this stock's fundamentals is the biggest reason we have seen mutual fund ownership jump from 130 funds four quarters ago to 244 as of the most recently reported quarter. Growing mutual fund ownership is always a sign of quality merchandise.
Questcor Pharmaceuticals (QCOR) is another medical-ethical drug stock, just like Jazz Pharmaceuticals. Questcor Pharmaceuticals is an Anaheim, CA developer of prescription drugs to treat diseases and disorders of the central nervous system. EPS growth the past six quarters have come in with gains of 27%, 7%, 800%, -15%, 43%, and 53%. Sales growth, during the same six quarters, have gained 13%, 12%, 126%, 13%, 40%, and 62%. 2011 and 2012 earnings estimates are for 66% and 49% growth respectively. Even though the numbers are not as exciting as Jazz Pharmaceuticals, it is clear there is some serious growth in this stock's future.
Debt-to-shareholder equity is at 0%, while return-on-equity is an outstanding 38%, and cash flow is $0.62. The numbers this stock is currently producing is why mutual fund growth has increased from 226 to 341 funds during the past seven quarters. Don't let the high P/E ratio fool you. Despite a P/E ratio of 42, which is at the high end of its five-year range, the growth estimates for this stock are so high that the current P/E number is bound to come down. It is also important to remember that the P/E ratio has proven to be ineffective when it comes to finding the greatest stocks in the stock market.
Turning our attention to the computer software-medical industry group, we have one clear leader holding up like a true champion in the middle of the market mayhem: Athenahealth (ATHN), a Watertown, MA-based provider of billing, collections, and medical record management software for physician practices. ATHN's quality product mix is the main reason EPS growth the past five quarters has come in at 20%, 100%, 65%, 183%, and 83%. Sales growth is even more impressive with gains of 39%, 33%, 33%, 28%, 33%, 27%, 28%, and 33% the past eight quarters. The future looks to be solid with EPS estimates for 2011 and 2012 to show gains of 31% and 36% respectively.
The company has a debt-to-equity ratio of 4%, spends 7.5% of profits on research and development, has a return-on-equity of 15% and a cash flow of $1.01. Mutual fund ownership hasn't seen too much of an acceleration with the numbers barely budging over the past four quarters from 347 to 349 funds. On top of that, management only owns 4%, which is a bit disappointing. It's always better to see management have a vested interest in the company.
Finally, we take a look at a more speculative play that is hitting new 52-week highs. Mako Surgical (MAKO) is a Ft. Lauderdale, FL-based developer of proprietary advanced robotic systems and implants used in minimally invasive orthopedic knee procedures. The stock is speculative because currently it does not make money and estimates for 2011 and 2012 still show losses of -0.89 and -0.45 respectively. However, as you can tell by looking at the quarterly numbers, EPS is on its way to becoming positive somewhere in 2013 and 2014. Sales growth indicates that will happen sooner or later with sales growing 763%, 812%, 94%, -31%, 78%, 67%, 80%, and 81% over the past eight quarters.
Besides having no debt, my data provider does not have any return-on-equity information and shows a negative cash flow of $-0.87. Still clearly the future growth is what mutual funds care about as ownership has increased from 111 to 187 funds over the past eight quarters. On top of that, management owns 27% of the shares outstanding, so management is very invested in this company's future.
I base 75% of my decision to buy a stock based on fundamentals. However, the final decision as to when to buy the stock always relies on the technicals. During the past week, Quest Pharmaceuticals and Jazz Pharmaceuticals gave me buy signals off their 50-day moving averages. I await the same from Mako Surgical and Athenahealth. I will be looking for either a high volume bounce off the 50-day moving average or a pocket-pivot buy signal off the 10-day moving average. If any of these stocks break down on strong volume, I will sell my positions and reevaluate the situation in each stock accordingly.
My methodology is geared more toward active investing as I have to make money now to survive. However, for investors with a longer-term time frame, all four of these stocks have very bright futures as long as they can keep producing the growth that we see in the current fundamentals.