2 Biotech Stocks Leading This Rally

Includes: ALXN, SHPG
by: Joshua Hayes

The overall stock market continues to be in a solid uptrend with multiple stocks across multiple sectors leading the way higher. The best industry group during this current uptrend, based on Relative Strength to the SP 500, has been the Medical-Biomed/Biotech group.

Quite a few stocks have done very well in this sector during this current uptrend. Two stocks stand out in this group as real leaders that have the potential to become long-term winners once this current uptrend has passed.

Let's take a look at Viropharma Inc. (VPHM) and Alexion Pharmaceuticals (NASDAQ:ALXN) and go into the key fundamentals that should allow these companies to continue to grow for many future market cycles.

Viropharma Inc. is an Exton, PA developer of products for the treatment of hereditary angioedema and clostridium difficile infection (CDI).

Viropharma Inc. has increased it EPS the past eight quarters quite impressively, growing 286%, 167%, 38%, 68%, 85%, 47%, 0%, and 8%, respectively. Sales growth during this time has grown 76%, 51%, 33%, 46%, 38%, 40%, 18%, and 21%. Growth is expected to continue throughout the year with 2012 annual EPS estimates for a 9% gain compared to 2011.

Viropharma Inc. sports a solid return on equity of 19%, a cash flow of $2.02, an EPS growth rate of 10%, a debt to shareholder equity of 16%, and spends 9% of sales on R&D. If you are looking for a "cheap" stock you will not find it here as it carries a P/E ratio of 15 which is at the high end of its 5-year range of 4-16. 130 years of stock market research of the best performing stocks proves that the P/E ratio is not important when selecting the best stocks for big returns.

Management only owns 4% of the shares outstanding. While this is disappointing it is not as important as mutual fund ownership. Mutual fund ownership has increased from 338 funds eight quarters ago to 405 as of the most recently reported quarter. This increase in ownership increases the odds that future sell offs will be supported by these funds that have taken new positions in the stock. This support usually shows up around the 50 and 200 day moving averages.

Viropharma Inc. sports some impressive numbers but these take a backseat to the growth numbers Alexion Pharmaceuticals is producing. Alexion Pharmaceuticals is a Cheshire, CT developer of therapeutics to treat cancer, autoimmune disorders, transplant rejection, hematologic and neurologic diseases.

Alexion Pharmaceuticals' EPS growth has been nothing less than spectacular the past eight quarters with gains of 33%, 46%, 33%, 32%, 63%, 58%, 45%, and 48%, respectively. Sales growth during this time is on par with earnings, with gains of 43%, 45%, 36%, 38%, 41%, 41%, 48%, and 44% the past eight quarters. Final 2011 annual EPS estimates are for YOY gains of 46%. 2012 annual EPS estimates are for a YOY gain of 28%. These are extremely strong numbers from a company in the Medical-Biomed/Biotech group.

Alexion Pharmaceuticals has a tiny debt to shareholder equity of 1%, a return on equity of 22%, a cash flow of $1.10, and EPS growth rate of 72%, and spends 18% of sales on R&D. The current P/E ratio of 63 is in the lower end of its 5-year historical range of 30-171. Despite it being at new 52-week highs, Alexion Pharmaceuticals is technically "cheap" to the value crowd.

Like Viropharma, Alexion Pharmaceutical's management only owns 4% of the shares outstanding. More importantly, mutual funds are increasing their exposure to the company. Mutual fund ownership has exploded from 655 funds eight quarters ago to a current 1022 as of the most recently reported quarter. Every quarter, more and more mutual funds invest in this company. The strong financials above are why.

While both of these companies have great futures and will serve long-term investors well, I believe the best bet against ruin is to use technical analysis to help better time positions. This way, you can maximize your gains during uptrends and minimize your losses during downtrends.

Since both stocks are currently in strong uptrends, it is dangerous to blindly buy right here. Your best bet is to wait for pullbacks to the 50 day moving average (the white line in upper panel) and buy them with bounces off this key support line where historically mutual funds come in to support their favorite stocks. If you purchase the shares off this line, you should use it as your final cut loss area.

Another possible area to purchase these stocks are on breakouts to new fresh 52-week highs on strong volume. Viropharma is currently setting up in a tight consolidation pattern. A breakout to a new high here would trigger a long signal. Once again, if the breakout reverses, you must cut your loss. It is the only insurance policy you have in the stock market that will prevent you from total ruin.

The only thing you can control in the stock market is how much money you lose per trade. The market will do whatever it wants to do as your stock rallies. You have no control over this. Once the rally stops, it is up to you to limit your damage so that you will have more capital to use during the next uptrend cycle.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VPHM over the next 72 hours.

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