With the stock market moving higher on above average volume the past two weeks, many stocks with strong fundamentals have made solid price gains. During this time, a lot of stocks have broken out to new 52-week highs and all-time highs. This is important because stocks breaking out to all-time highs historically continue to move higher.
The reason for this is that there is no one underwater when a stock hits new all-time highs. There are no bag holders, there is nobody wanting to get out to "break even," and there is no one looking for it to rise just one more dollar to cut their losses. There are just profits.
Many of these stocks that breakout to all-time highs continue to appreciate higher during strong stock market uptrends. With the current market trending higher, I want to review the fundamentals of three leading medical stocks nearing all-time highs and then go over where I am looking to accumulate shares as these stocks trend higher.
What is a leading stock? A leading stock has strong EPS growth, strong sales growth, a high profit margin, a high return on equity, low to zero debt to shareholder equity, mutual fund ownership growth, management ownership, high future EPS estimates, a high Relative Strength line to the overall market, and is within 15%-20% of its 52-week high.
The first stock is finally a growth stock, following over a decade of losses. Regeneron Pharmaceutical (RGEN) is a Tarrytown, NY developer of pharmaceutical products to treat inflammatory diseases, eye diseases, and cancer.
Regeneron Pharmaceuticals' EPS is finally growing, growing 216% and 264% the past two quarters. Sales growth has also recently exploded, following many quarters of either weak growth or declines. Sales have grown 107% and 182% the past two quarters. This new growth is expected to continue going into 2013, with EPS estimates expecting a gain of 56% from the year before.
Regeneron Pharmaceutical has 89% debt to shareholder equity, a profit margin of -3.6%, a cash flow of $-2.05, and spends 99.9% of sales on R&D. While these numbers are not flattering, it is due to the previous years of losses. As the EPS and sales growth continues to grow, these numbers will improve.
Mutual fund managers have taken notice of the recent growth with fund ownership increasing from 370 to 548 funds the past three quarters. Management owns 11% of the shares outstanding, indicating they are vested in making sure the company's share price appreciates.
Sticking with the Biotechnology theme, our next stock is Vertex Pharmaceuticals (VRTX). Vertex Pharmaceuticals is a Cambridge, MA developer of small molecule drug treatments for hepatitis C, inflammatory and autoimmune disorders, pain and cancer.
Vertex Pharmaceuticals' EPS has turned the corner, following years of losses, growing 180%, 216%, 160%, and 169% the past four quarters. Sales growth is even more impressive, growing 93%, 228%, 262%, 999%, 760%, 496%, and 286% the past seven quarters. More of this should be expected as annual EPS estimates for 2012 and 2013 are for gains of 675% and 47% respectively.
Vertex Pharmaceuticals has 51% debt to shareholder equity, a profit margin of 23%, a return on equity of 2%, a cash flow of $0.33, and spends 50.2% of sales on R&D. The current P/E ratio of 23 is in the middle of its 5-year range of 14-30.
Mutual fund ownership is on a steady climb, growing from 712 to 1059 funds the past seven quarters. Management owns 4% of the shares outstanding.
Our final stock is currently under a ton of accumulation (share price moving higher on extremely large volume) the past two months. Cynosure Inc. (CYNO) is a Westford, MA developer of aesthetic treatment systems for non-invasive hair removal, skin rejuvenation, and vascular/pigmented lesions.
Cynosure Inc.'s EPS, like our other two stocks, has turned the corner recently, growing 233%, 147%, and 999%+ the past three quarters. Sales have grown 6%, 16%, 16%, 23%, 48%, 53%, 56%, and 50% the past eight quarters. Annual EPS estimates for 2013 are for a gain of 40% compared to the year before.
Cynosure Inc. has 0% debt to shareholder equity, a 3% profit margin, a cash flow of $0.40 per share, and spends 9.1% of sales on R&D. The current P/E ratio of 92 is in the low-middle area of its 5-year range of 8-244.
Mutual fund ownership, after stagnating for quarters, is finally on the rise again, growing from 113 to 123 to 148 funds the past three quarters. Management owns 9% of the shares outstanding.
The fundamentals above, along with the stocks being near all-time highs, easily places these three stocks at the top of my current buy watch list.
As long as the growth continues, all three of these stocks make excellent longer term holdings for individual investors. I am, however, an intermediate term trend follower and thus only want to be long these stocks as they trend higher.
On that note, I am already long Cynosure Inc. but plan to continue to add to my position on subsequent pocket pivot point buy signals off the 10 day moving average (volume must be higher on the signal date than any down day's volume the past 10 days) and on a breakout to a new all-time high.
Vertex Pharmaceuticals has been throwing some pocket pivot point buy signals lately but they all have come on below average volume. Friday's above average volume move is the first one that is a legitimate signal. Subsequent pocket pivot point signals on above average volume will be where I will accumulate shares.
Regeneron Pharmaceuticals is in the exact identical situation as Vertex Pharmaceuticals, as all recent pocket pivot point buy signals have come on below average volume. A breakout to a fresh new all-time high and subsequent high volume pocket pivot point signals off the 10 day moving average is where I will begin accumulating shares.
One final note about my methodology is that if I purchase any of these stocks and they do not move higher immediately I will cut my losses and wait for the next signal to trigger. In the stock market, if you do not cut your losses, one day you will definitely end up taking the ultimate loss.
Disclosure: I am long CYNO. I may initiate a long position in REGN and VRTX over the next 72 hours.