Two bargain pharma stocks to buy now
By
Associate Editor
David Stevenson Feb 26, 2010
Print this article
Beating the stock market isn't easy. Even people who invest for a living – fund managers – fail to manage it consistently. But it can be done.
One tried and tested way is through buying relatively cheap 'value' stocks (more on these in a moment). But even in the value camp, there can be pitfalls. A lot of the time, stocks that appear to be good candidates for value investors are cheap for a reason – because they're in deep trouble.
So how do you weed out the duff stocks from the genuine bargains? The good news is that there's a simple number that can help you out – the Piotroski score...
How to tell why a stock is cheap
Value stocks are so-called because they look cheap when measured against the rest of the market. Their share prices are relatively low compared with their sales, profits, assets and dividend payouts.
And buying value stocks has done the business over the long-term. Between 1979 and 2006, value investors made twice as much money as holders of growth stocks (those seeing above-average earnings growth compared to the rest of the market).
But just buying value stocks doesn't guarantee success. There's always a reason for a share being cheap. It may be just out of favour for the time being. Markets can be both moody and fickle - and those are the stocks you want to buy.
Though there could be bigger problems. A value tag could mean that a firm is in a hole - and unable to dig itself out. And those are the ones you want to avoid. So if you can filter out the companies in the latter category, value investing becomes a whole lot easier.
Handily for us, University of Chicago Accounting Professor Joseph Piotroski sussed this out ten years ago. And so he put together a nine-point quality scoreboard to separate the wheat from the chaff, value wise. Better yet, it's nice and simple.
Under each part of his test, a stock is given one point if it passes and zilch if it doesn't. At the end, you just add up all the marks. The higher the final score, the better. You can read the nine Piotroski Score hurdles here, but suffice to say, it's about finding companies with improving profitability, decent cash flow and solid balance sheets.
How to profit from Piotroski's theory
Enough theory. What does it all mean in practice – and how can you profit from it?
Special FREE report from MoneyWeek magazine: When will house prices bottom out - and how will you know?
- Why UK property prices are going to fall 50%
- When it will be time to get back in and buy up half price property
After the recent stock market rally, it's been much harder making money in the market. But times like this are when the Piotroski scorecard really cuts the mustard. Since September last year, stocks in Europe with a high Piotroski score have outperformed those with a low rating by 12%, says Morgan Stanley's European strategy team.
That's pretty good going. But remember that this isn't a quick-fix method. Value investing is about taking the long view. For the first year or so, stocks that rank highly on the scorecard are likely to do worse than the rest of the market. Yet over the 20 years of the prof's research, scores of eight or nine beat the market by 10% a year.
So what's top of the Piotroski list? Just three stocks currently have full marks, according to Morgan Stanley's latest crunching of the numbers, while another 16 score a total of 8 out of 9. Pole position goes to digital security world leader Gemalto (FP: GTO).
Gemalto has some other attractions too. The risks are growing that companies almost everywhere will soon have to pay more to borrow, as we discussed in Money Morning last week. So having low borrowings, or preferably net cash, in your balance sheet could prove a real boon. And Gemalto has net cash equating to 27% of its overall net asset value.
Two bargain pharma stocks
So far so good. But I'd like to add in one more thing to the wish list – a decent dividend yield. Although Gemalto looks good-ish value on a current year p/e of 13.8, which is forecast to drop to below 12 next year, it only yields about 1%. So I'm more interested in the other two stocks which tick all the Piotroski boxes, as well as holding net cash and paying a decent yield. They're both in the 'pharma' sector, which is one of the defensive sectors we like.
Copenhagen-quoted H.Lundbeck (DC: LUN) has 13% of its net assets in cash. It's priced in Danish Kroner (DKK). At 96.8, it's clearly cheap on a current year p/e of 7.7. The prospective yield is 3.7%. Meanwhile AstraZeneca (LSE: AZN) is even cheaper on a forecast 2010 multiple of 7.3. Here the prospective yield is 5.6%.
In uncertain markets, you need to stack up as many plus points as you can. With these two shares, you can't really ask for more.
Our recommended article for today
Demand for uranium is already outstripping supply, and the world's post-Cold War stockpiles are running low. With nuclear energy back in vogue, demand is only going to rise. And that means the price must go up too, says Chris Mayer.
Published in
Tips & advice
| More
articles
by
David Stevenson
Related articles
-
Jun 02, 2012
-
Jun 01, 2012
-
May 31, 2012
-
May 30, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.