Even the most promising research and inventive devices will not realize their true potential if they are not paired with well managed companies. This is especially relevant in the ever expanding sector of biotechnology. When a biotech company has key fundamentals like strong profits and a reservoir of cash, then it is worthy of consideration. Take a look to see if any of the stocks in our list grab your attention.
Return on Equity [ROE] is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. As well, this metric segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. EPS growth rates help investors identify stocks that are increasing or decreasing in profitability. This profitability metric is generally a key driver in the price of the stock as it directly correlates to the profitability of the company as a whole.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The quick ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
We first looked for biotechnology stocks. From here, we then looked for companies that have been able to maintain a sound level of profitability for shareholders (ROE [TTM]>30%)(1-year fiscal EPS growth rate>10%). We next screened for businesses that have strong liquidity (Current Ratio>2)(Quick Ratio>2). We did not screen out any market caps.
Do you think these stocks will perform well? Please use our list to assist with your own analysis.
1) Spectrum Pharmaceuticals, Inc. (SPPI)
Spectrum Pharmaceuticals, Inc. has a Return on Equity of 49.60%, a Earnings Per Share Growth Rate of 184.84%, a Current Ratio of 3.18, and a Quick Ratio of 3.07. The short interest was 42.02% as of 08/04/2012. Spectrum Pharmaceuticals, Inc., a biotechnology company, engages in acquiring, developing, and commercializing prescription drug products primarily in the areas of hematology and oncology. It offers ZEVALIN, a prescribed form of cancer therapy which combines a source of radiation with an antibody; and FUSILEV for patients with osteosarcoma after high-dose methotrexate therapy, as well as to diminish the toxicity and counteract the effects of impaired methotrexate elimination or inadvertent overdose of folic acid antagonists. The company also develops apaziquone that is under Phase 3 clinical trials for non-muscle invasive bladder cancer; and belinostat, which is under Phase 2 registrational trial for relapsed or refractory peripheral T-cell lymphoma.
2) Vertex Pharmaceuticals Incorporated (VRTX)
Vertex Pharmaceuticals Incorporated has a Return on Equity of 44.78%, a Earnings Per Share Growth Rate of 103.73%, a Current Ratio of 4.02, and a Quick Ratio of 3.66. The short interest was 3.31% as of 08/04/2012. Vertex Pharmaceuticals Incorporated engages in discovering, developing, manufacturing, and commercializing small molecule drugs for the treatment of serious diseases worldwide. Its products include telaprevir, a prescription medicine used for the treatment of patients with genotype 1 hepatitis C virus (HCV) infection; and Ivacaftor, a prescription medicine used for the treatment of cystic fibrosis. The company markets its products under the INCIVEK brand name in the United States and Canada; INCIVO brand in the United Kingdom, Germany, France, Sweden, Austria, Finland, Denmark, Switzerland, and Norway; KALYDECO brand in the United States; and TELAVIC brand in Japan.
3) SIGA Technologies, Inc. (SIGA)
SIGA Technologies, Inc. has a Return on Equity of 57.76%, a Earnings Per Share Growth Rate of 140.27%, a Current Ratio of 6.53, and a Quick Ratio of 6.40. The short interest was 19.82% as of 08/04/2012. SIGA Technologies, Inc., a pharmaceutical company, engages in the development and commercialization of pharmaceutical solutions for smallpox, Ebola, dengue, Lassa fever, and other dangerous viruses. Its lead product is ST-246, an orally administered antiviral drug that targets orthopoxviruses. The company also has two drug series in the pre-clinical development stage against four serotypes of virus for dengue disease.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.