One way to search for potentially undervalued stocks is by finding stocks that are trading at significant discounts to their mean analyst target price. Although target price is known to suffer from an upward bias, if a stock is trading at a steep discount to the number, it may be undervalued.
We ran a screen on stocks from the biotech industry that have seen strong growth in cash flows, comparing the trailing-twelve-month free operating cash flow/revenue to the company’s 3-year average. We screened these stocks for those that are trading at steep discounts to target price.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 (NYSEARCA:SPY) index over the last month.
(Click chart for more detail)
Do you think these stocks are undervalued? Use this list as a starting-off point for your own analysis.
List sorted by market cap.
1. Covance Inc. (NYSE:CVD): Provides early-and late-stage services to the pharmaceutical, biotechnology, and medical device industries. Market cap of $2.94B. TTM free operating cash flow/revenue at 0.11 vs. 3-year average at 0.05. Target price at $63.33 vs. current price at $48.48 (implies a potential upside of 30.63%). The stock is a short squeeze candidate, with a short float at 5.79% (equivalent to 5.46 days of average volume). The stock has gained 24.15% over the last year.
2. United Therapeutics Corp. (NASDAQ:UTHR): Engages in the development and commercialization of therapeutic products for patients with chronic and life-threatening diseases in the United States and Internationally. Market cap of $2.53B. TTM free operating cash flow/revenue at 0.34 vs. 3-year average at 0.03. Target price at $55.50 vs. current price at $43.30 (implies a potential upside of 28.18%). The stock has performed poorly over the last month, losing 15.64%.
3. Par Pharmaceutical Companies Inc. (NYSE:PRX): Engages in the development, manufacture, and distribution of generic and branded drugs in the United States. Market cap of $1.0B. TTM free operating cash flow/revenue at 0.15 vs. 3-year average at 0.08. Target price at $38.20 vs. current price at $27.49 (implies a potential upside of 38.96%). The stock has lost 1.58% over the last year.
4. Genomic Health Inc. (NASDAQ:GHDX): Focuses on the development and global commercialization of genomic-based clinical laboratory services that analyze the underlying biology of cancer allowing physicians and patients to make individualized treatment decisions. Market cap of $621.65M. TTM free operating cash flow/revenue at 0.07 vs. 3-year average at 0.02. Target price at $26.35 vs. current price at $21.08 (implies a potential upside of 25.0%). The stock is a short squeeze candidate, with a short float at 9.45% (equivalent to 19.61 days of average volume). It's been a rough couple of days for the stock, losing 6.85% over the last week.
*Free operating cash flow/revenue and target price data sourced from Screener.co, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.