Two 5-Star Biotech Picks From S&P

Includes: CELG, GILD
by: Bret Jensen


Biotech stocks have had one of their biggest pullbacks in years recently.

Although small cap biotechs still look overvalued, large cap concerns with substantial earnings growth look attractive on a long term basis.

Below are two five-star rated large cap biotechs from S&P that have strong earnings prospects and are attractive at current levels.

The biotech sector posted its worst one day performance in two years on Friday. Monday's action was hardly better as the space posted another significant decline. Even with the big pullback, the small biotechs with no current earnings still look overvalued as they have been bid up to very elevated levels over the past year.

However, it is a different story for some of the major biotech concerns with rapidly growing profits and good earnings growth visibility. Their pullbacks are starting to look like good opportunities to start to build longer term positions. The sell-off across the sector seems to be offering good long term entry points on some of the large cap plays. Here are two of the bigger biotech equities that look attractive here. Both are five-star rated, also known as "Strong Buys", at S&P.

Celgene Corp. (NASDAQ:CELG) primarily develops and commercializes small molecule drugs for the treatment of bloodborne and solid tumor cancers and inflammatory disease. The stock has dropped more than 15% from recent highs with the overall pull back in the biotech space. CELG goes for just over $140 a share.

According to the current consensus, earnings should increase more than 20% in FY2014 and then to accelerating to almost 25% Y/Y earnings growth in FY2015. After its recent decline, the shares go for under 15x next year's projected earnings and the stock now sports a five year projected PEG of under 1 (.79).

The company has a solid balance sheet with no net debt. It garners S&P's highest rating "Strong Buy" and also has a $208 a share price target on the stock. The median price target by the 25 analysts that cover the stock is $191 a share, $50 a share above its current price.

Gilead Sciences (NASDAQ:GILD) is engaged in the discovery, development and commercialization of treatments to fight viral, bacterial and fungal infections, respiratory disorders, cardiovascular conditions, and cancer. It has major drug franchises treating HIV and Hepatitis C. The company has drawn ire from some in congress for the high price of its new Hep C drug, Sovaldi.

The stock had a major reversal in trading Monday as the shares rallied from a big initial decline to post slight gains. The shares are still down more than 15% from recent highs. Gilead has one of the strongest earnings trajectories in big biotech. Gilead posted just over $2 a share in earnings in FY2013. The consensus is currently calling for just under $4 a share in profit in FY2014 and over $5.50 a share in FY2015.

GILD has a very low five year projected PEG (.53) and the shares sell for just over $72 a share after its recent pullback. S&P has its five-star rating and a $116 a share price target on GILD. The mean analyst price target by the 24 analysts that cover Gilead is right at $100 a share.

Disclosure: I am long GILD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.