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Express Scripts Looks Undervalued In A Very Hot Sector

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  • The company's shares have fallen by more than 10% since the Anthem fallout was announced.
  • Express Scripts will bounce back. Its competitive advantages are too strong.
  • The biotech sector looks like it has very little resistance ahead. Express Scripts will ultimately rally with the sector.

Express Scripts (NASDAQ:NASDAQ:ESRX) continues to underperform both the market and the biotech sector which may mean we have a ripe opportunity brewing. Even Gilead (NYSE:GILD) which had underperformed the biotech sector for up to 20 months finally seems to have found a bottom due to the strong biotech tailwind we have had since the start of the year. In fact, the iShares Nasdaq Biotechnology Index (NASDAQ:IBB) is now up 17% year to date. I just fail to see how Express Scripts will continue to fall in the face of broad market strength in general, which continues to demonstrate strong M&A activity. Being the biggest pharmacy benefit manager in the US, Express Scripts holds significant competitive advantages over its competitors - advantages I believe will stand the test of time.

To name but a few would be the company's vast scale on the provider's end (where the company can leverage its scale to ensure competitive pricing from drug providers). This advantage can then be transferred over to the customer side where the customer can save on prescription costs. This has to lead to more customers over time. We are already long McKesson Corporation (NYSE:MCK) on the distribution side in this sector, again primarily due to current undervaluation and scale advantages. McKesson, however, is well off its lows but shares of Express Scripts are still hovering around the $60 level. I believe the divergence of Express Scripts against the biotech market in general will come to an end pretty soon. Here are some reasons why.

Express Scripts, as the chart illustrates above, has been in a steady downturn since mid-2015. Although the biotech sector also dropped sharply from mid-2015 on, the sector has actually been making higher highs since June of last year. Furthermore on the biotech chart, there seems to be very little resistance until the $340 level

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ESRX over the next 72 hours. 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.

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