Monday’s market was very interesting. Both the Dow and S&P showed minor losses, with the tech laden Nasdaq notching a more significant selloff. Even as the market has churned over the last month or so, with the S&P up roughly two percent over the last thirty days, the undercurrents underneath seem to be changing. The market is rotating out of high beta stocks and into the defensive sectors such as healthcare. To demonstrate the beginnings of this rotation, look at the high beta stocks I profiled as overvalued in “These Cramer Favorites should be S.O.L.D”
which consisted of Salesforce (NYSE:CRM
), OpenTable (NASDAQ:OPEN
), LuluLemon (NASDAQ:LULU
) and Deckers (NASDAQ:DECK
). All four stocks in this index have gone down since this article ran for an average loss of a little over 7%, with OpenTable being the big loser with an over 19% loss since April 18th
In contrast, the S&P is up a little over two percent over the same time period. I think OPEN’s problems will continue in the short term as it is still priced to perfection with a PEG of over 2, a market cap that is 18 times trailing revenues, as well as steady and heavy insider selling. Longer term, OPEN’s business model is vulnerable to new competitors and better technology that provides open standards. LULU and DECK should suffer with other retail stocks as gas prices stay high and negatively impact consumer sentiment and spending. CRM will probably get a pop after earnings this week, as its CEO is a master salesman; but longer term it will have a hard justifying selling at over 100 times this year’s projected earnings.
OPEN - 19.10%
LULU - 2.88%
DECK - 3.85%
SPY + 2.01%
I think high beta stocks and commodities will continue to be punished as the end of QE2 occurs. On the opposite spectrum from the performance of high beta stocks, the healthcare sector has performed admirably over the last month. Stocks I have highlighted in previous articles like Novartis (NYSE:NVS
), J&J (NYSE:JNJ
), Abbott Labs (NYSE:ABT
), Amgen (NASDAQ:AMGN
), Gilead Sciences (NASDAQ:GILD
) and Forest Labs have all posted solid gains. Another healthcare stock I think is worth a look is Mylan Labs (NASDAQ:MYL
Mylan Labs - Mylan Inc. and its subsidiaries engage in the development, manufacture, marketing, licensing, and distribution of generic and branded generic pharmaceuticals, specialty pharmaceuticals, and active pharmaceutical ingredients (APIs) worldwide. It operates in two segments, Generics and Specialty. The Generics segment offers generic or branded generic pharmaceutical products in tablet, capsule, or transdermal patch form, as well as APIs. This segment markets its products for the proprietary and ethical pharmaceutical wholesalers and distributors, drug store chains, drug manufacturers, institutions, and public and governmental agencies located primarily in the United States and Canada, Europe, the Middle East, Africa, Australia, Japan, India, and New Zealand.
Valuation – MYL sells at approximately 12 times this year’s projected earnings and just over 10 times 2012’s consensus earnings. It sells for less than two times revenue and has a projected PEG of less than 1.
Positive Trends and Catalysts – There are several things I like about Mylan Labs:
1. It is in the vanguard of a secular trend in pharma, which is the movement to generics. Given the amount of blockbuster drugs coming off patent over the next years; this trend should accelerate
2. Product launch calendar for 2011 is weighted towards second half of year. Launch news will be more positive as we move throughout the year
3. Revenue increases in the double digits are projected both for 2011 and 2012
4. Growth in Asia is projected at over 30% this year, and 16% average over the next five years
5. Mylan has a wide and diverse portfolio of generics. The acquisition of Merck KGaA’s generic business will expand the portfolio further
6. Mylan just announced a $350mm stock buyback
Recommendation: Given Mylan’s growth prospects and valuation, I believe MYL is undervalued. In my view, a more reasonable valuation is 12-13 times 2012’s consensus EPS of $2.33 or $28 to $30 a share. This is a 20% upside from the current price of $23.81. BUY
Disclosure: I am long JNJ, GILD, NVS.