By Tim Begany
The stock market has been insane the past few years, so many financial advisors are understandably steering clients toward safer blue-chip stocks. It's a sound strategy. Because of their dividends, blue chips are often a lot less volatile than the overall market and many have decent growth potential, too.
Still, many investors would gladly tolerate the higher risk of smaller stocks for the chance to earn higher returns, and I think many of these stocks can be good additions to a diversified portfolio.
One of my favorites, United Therapeutics Corp. (Nasdaq: UTHR), has certainly seen its share of risk, the latest example being a 25% loss in 2011. But the stock has seen plenty of good years, too, averaging 25% a year for the past decade.
Although this is a smaller company by Wall Street standards, a market capitalization of $2.7 billion means it's big enough for many investors to have heard of it. If you're looking to give your portfolio an adrenaline shot and you've got a slot open for a biotech, then consider this stock. Shares could easily double, possibly even triple, during the next three to five years.
From a valuation standpoint, the stock is unbelievably cheap. True, its price-to-earnings (P/E) ratio of 15.8 is noticeably higher than the S&P 500's (NYSEARCA:SPY) P/E ratio of 13.7. But the stock is trading at a 70% discount to the biotechnology industry as a whole, which has a P/E ratio of nearly 53. Similarly, the price-to-cash flow (P/CF) ratio of 12 for United Therapeutics is also markedly lower than the industry average of 28.7.
Some analysts might argue United Therapeutics deserves to be cheap because its new drug Remodulin, a medication for a cardiovascular condition called pulmonary arterial hypertension (PAH), showed mixed results in clinical trials. I don't see this as a big problem, though. Even if Remodulin doesn't end up being approved for use in the United States -- and it still might -- the drug is already approved and in use in the European Union (EU). In fact, EU sales topped $400 million in 2010, and were probably comparable with last year (I haven't yet found any official results for 2011). Moreover, Remodulin is expected to gain approval in Japan by late 2013, which should add another $100 million to annual sales, analysts estimate.
Even without U.S. approval of Remodulin, United Therapeutics is a powerhouse. Its other two PAH drugs, Adcirca and Tyvasco, combined for $86 million of sales in the third quarter of 2011, for example, and should generate progressively more revenue for some time. Both are relatively new drugs -- Adcirca only received Food and Drug Administration (FDA) approval in May 2009, while Tyvasco was approved in July 2009. These drugs are currently only prescribed for 20% of patients with PAH, so there's still plenty more room for expansion.
I also like United Therapeutics' product pipeline, which could yield high-revenue products for years to come. A new drug for brain cancer called ch14.18, for example, appeared to be very effective in clinical trials and is currently being considered by the FDA. I'd be very surprised if the drug wasn't approved within a year or two. United Therapeutics is also developing drugs to treat various cancers and infectious diseases. On Oct. 12, 2011, for instance, the company signed a $45 million contract with the National Institutes of Health to develop drugs to treat influenza and other viruses.
Risks to Consider: Like all biotech firms, United Therapeutics faces the risk that new drugs don't work out and fail to gain approval, or that existing drugs exhibit previously unknown side effects. Either scenario could hurt profits.
Look for United Therapeutics to meet or even slightly beat analyst estimates for full-year revenue of $750 million in 2011, followed by an 18% gain to $885 million in 2012. Annual revenue growth is forecasted to be 21%, while cash flow is expected to soar 28% annually to $673 million during the next three to five years. Earnings per share (EPS) are projected to expand 29% a year from $3.55 to $12.68 during this time.
Considering how cheap shares are right now and how promising the future looks for United Therapeutics, I agree with analyst estimates for a stock price of at least $115 a share by the end of 2016 -- a gain of about 140% from current prices. A threefold increase to the $140 range may also be in the cards. If you're among those willing to take more risk for a chance at greater returns, then United Therapeutics is certainly worth considering.
Disclosure: Tim Begany does not hold positions in any securities mentioned in this article. StreetAuthority, LLC does not hold positions in any securities mentioned in this article.