The market staged a very powerful rally on Tuesday, following a breakdown to new 52-week lows on Monday. This reversal came with very strong volume on the indexes and some of the 2x/3x ETFs saw their biggest volume ever. This bullish reversal came with many stocks making big moves on big volume. This is being confirmed with the positive price action in the indexes the past two days.
Helping make the bullish case is the fact outflows from domestic equity mutual funds totaled $5.7 billion for the week ended September 30. The NYSE short interest soared to a whopping 15.7 billion shares as of September 15, an 828 million increase in one fortnight, and the biggest since the March 2009 lows. Finally, the Investor Intelligence survey is very bearish with bears beating bulls 45% to 34%. The last time bears were this high was also at the March 2009 lows.
It is still too early to call this a new bull market but the start to this rally has all the ingredients to turn into a good uptrend. The final confirmation will come with one of the indexes giving a follow-through day signal. This will give us the green light to start hunting for high quality stocks with strong fundamentals and technicals.
Right now, the clear leaders, price wise, are medical stocks. Medical stocks have held up very well during the market pullback and based on 130 years of stock market history the stocks that hold up the best during a bear market end up leading a new bull market. While we don’t know if this is a new bull market or just another ho-hum uptrend, we do know that we have leading medical stocks that have the potential to make some big gains.
Last month I profiled four top-quality medical stocks that have the ingredients to be big winners during this possible new uptrend. Today, let’s take a look at three more stocks from the group that have great fundamentals and the necessary growth to produce some big gains.
Alexion Pharmaceuticals (NASDAQ:ALXN) is a Cheshire, CT, developer of therapeutics to treat cancer, autoimmune disorders, transplant rejection, hematologic and neurologic diseases.
The growth in Alexion Pharmaceuticals is explosive. During the past eight quarters, compared year-over-year, EPS has grown 36%, 33%, 32%, 63%, 58%, and 45%. Sales growth, during the same time, has grown 34%, 43%, 45%, 36%, 38%, 41%, and 48%. 2011 and 2012 annual EPS estimates are for gains of 34% and 39% respectively.
The company sports a 22% return on equity, a debt-to-shareholder ratio of 1%, and a cash flow of $1.00. These solid numbers combined with the fact Alexion Pharmaceuticals spends 18.2% of sales on R&D hints to continued future success.
The numbers above are the main reason mutual fund ownership has increased from 803 funds to 1052 funds the past eight quarters. It’s unfortunate management is not more invested owning only 4% of the shares outstanding. However, that is more due to the fact the company has been around a long time rather than them not having their own financial interest at stake. In fact in the coming years I am sure they will wish they had.
The next stock is a stock everyone has heard about at least once or twice. Biogen Idec (NASDAQ:BIIB). Biogen Idec is a Weston, MA developer of treatments for multiple sclerosis, cancer, and autoimmune/inflammatory diseases.
While growth is nowhere near as exciting as Alexion Pharmaceuticals it is still solid and consistent. For the past eight quarters EPS has grown 14%, 29%, 3%, 75%, 21%, 18%, 32%, and 4%. Sales growth during that time have grown 3%, 5%, 7%, 11%, 5%, 8%, 9%, and 0%. For 2011 and 2012 Biogen Idec’s annual EPS estimates are for gains of 14% and 8% respectively.
The company does have 20% debt to shareholder equity but that is definitely not a problem when you have a cash flow of $6.07, a return on equity of 23%, and spend 26.5% of your sales on R&D.
Biogen Idec is a giant so you are not going to see much change when it comes to mutual fund ownership. Ownership has risen from 1516 to 1550 during the past four quarters and fallen from 1676 eight quarters ago. Obviously, with Biogen Idec being around forever, management has 0% of the shares outstanding.
The last stock comes to us out of the generic drugs industry group and not the biotech group like the last two. Hi Tech Pharmacal (NASDAQ:HITK) is an Amityville, NY developer of prescription over-the-counter, generic, and nutritional products for bronchial, dermatological, and health care disorders.
EPS growth for the past eight quarters has come in at 567%, 272%, 20%, -11%, 32%, 25%, 100%, and 59%. During that time, sales growth has increased 63%, 32%, 3%, -2%, 9%, 28%, 45%, and 43%. While the current numbers are great, future estimates are not. 2012 and 2013 EPS estimates are for drops of -9% and -10% respectively.
The company has 0% debt to shareholder equity, a cash flow of $3.44, and a return of equity of 28%. Impressive numbers. Too bad the spending on R&D wasn’t a little more. It’s possible that if they spent more than 4.9% on R&D that future EPS estimates would be stronger.
Despite an estimated slowdown, mutual fund ownership has grown from 164 funds eight quarters ago to 225 today. Management has 24% of the shares outstanding so clearly they are invested and will want to make sure the company keeps growing.
All of these stocks are fantastic stories and all have good to great fundamentals. However, I never base my buy decisions on fundamentals alone. They are the most important part of stock analysis but they don’t help much when timing for an entry or exit. Therefore, first off, the market must remain in an uptrend off the recent lows. Second, I then need a buy signal to be triggered to take them long. Alexion Pharmaceuticals has already done that.
To purchase Biogen Idec or Hi Tech Pharmacal, I will need to see them either breakout of a sound basing pattern on strong volume, bounce off the 50 day moving average on strong volume, or produce a pocket-pivot point buy signal off the 10 day moving average. Any of these outcomes would provide a proper buy signal. If, after the purchase, the stock does not go higher immediately, I will cut my loss and re-evaluate for a potential next entry.
Disclosure: I am long ALXN.