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What are we looking for?

Relatively undervalued biotechnology stocks in the United States.

Biotech companies are currently involved in fascinating ventures that could change everyone’s lives, from predictive genetics to advancements in life-saving pharmaceuticals. For investors, some companies inevitably will be leaders of the pack and provide above-average returns. This subsector of health care should continue to experience impressive growth and deserves attention.

The screen

We used the Eikon Screener application to search for companies in the biotechnology subsector, as identified by the Global Industry Classification Standard, or GICS.

These are the metrics chosen for our filter:

  • A company market capitalization of more than US$1-billion.
  • A five-year average return on equity (ROE) larger than 5 per cent. This measures the ratio of the reported net income of the selected period over the shareholders’ equity, which comprises the share capital and retained earnings.
  • A 30-day relative strength index (RSI) less than 50. This short-term indicator is used in technical analysis to identify overbought or oversold stocks. A security with an RSI below 50 means that it is relatively oversold and that the price is more likely to go up in the short term.

The resulting universe of stocks was then ranked by the Analyst Revisions Model (ARM) score and the Earnings Quality Model (EQM) score. A 50-per-cent weight was given to each of these two StarMine models. The ARM looks at recent analyst recommendations and overweights the most successful ones. The EQM is a directional model that measures earnings sustainability across four factors: accruals, cash flow, operational efficiency and the company’s use of exclusions in its financial statements. (On that last point, companies can sometimes try to mark negative events as ‘’extraordinary items,” but those can actually be recurring and will affect earnings over the long run. The less frequently exclusions are used, the better.)

More about the Eikon Screener and Starmine models

The Screener is an application available within Thomson Reuters Eikon that allows an investor to filter a particular universe of stocks with hundreds of possible criteria. One may then rank the results according to one factor or several, and weigh this influence on the ranking accordingly. StarMine models provide a suite of proprietary alpha-generating analytics and models spanning sectors, regions and markets.

What we found

Only five companies came out of the filtered universe of stocks. The biotech subsector is seeing massive changes right now, both in terms of what type of research these companies conduct and the regulatory burden they face. More investments are being made in predictive genetics, where one could reasonably assess risks of a disease for a spouse or future child, and in cancer research. ImmunoGen Inc., Halozyme Therapeutics Inc. and Array Biopharma Inc. are specifically focused on cancer research and drug commercialization.

The required RSI under 50 by definition indicates an oversold situation and, therefore, an attractive price. Note that all five stocks also have one-year returns above 25 per cent, but don’t offer dividends, with the exception of AbbVie. Growth potential is there for these well-positioned companies and shareholders should reap the benefits.

All things considered, ImmunoGen Inc. may provide the most upside, given the relatively low share price, strong EQM rank and good ROE.

Biotech stocks poised for continued growth

EQM/ARM RankCompanySymbolRecent price (US$)52W Price Chg.Div. YieldMkt. Cap. (US$ Mil.)ROE (5Y Avg.)30D RSIARM Score (out of 100)EQM Score (out of 100)
1AbbVie Inc.ABBV-N93.1128.4%2.8%147,754.3159.537.26998
2Emergent BioSolutions Inc.EBS-N52.0553.5%0.0%2,593.39.249.87665
3ImmunoGen Inc.IMGN-Q10.1843.2%0.0%1,493.632.546.21999
4Halozyme Therapeutics Inc.HALO-Q16.7830.9%0.0%2,415.718.833.55100
5Array Biopharma Inc.ARRY-Q16.5798.0%0.0%3,490.3252.843.93946

Source: Thomson Reuters Eikon

Investors are encouraged to conduct further research before investing in any the companies shown here.

Guillaume Laframboise, CFA, is a client specialist with Thomson Reuters.