Drug Stocks: The Next Hot Industry Or Value Traps?

• (0:15) - Drug Stocks: Value Traps or Opportunity?
• (1:30) - Tracey’s Top Stock Picks
• (11:45) - Health Service Industry
• (14:20) - Episode Roundup: Podcast@Zacks.com

Welcome to Episode #96 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

Recently, investors on Stocktwits and Twitter have been asking about some of the drug stocks.

If you look at the valuations, you can see why.

Many are dirt cheap, with some trading with single digit P/Es.

Problem is, the Street hates them (which makes them perfect for value investors.)

Retail and energy stocks were hated over the last several years too but have staged big turnarounds in 2018.

Will the drug stocks be the next big turnaround success story?

Definition of a Value Trap

Remember, a value trap is a stock that looks cheap based on basic value fundamentals like the P/E ratio.

Who doesn’t like a company trading at 5x earnings?

But sometimes there’s a reason for the cheapness. Investors have to look beyond the value fundamentals at earnings.

Are they rising or falling?

Rising earnings with a low P/E tells you that something right is going on at a company. But an earnings decline can be a sign that the company has lost its way.

Value Stock or a Trap?

1. Gilead Sciences (NASDAQ:GILD) has a forward P/E of just 11.8. Shares are down 13.3% over the last 2 years while the S&P 500 has gained 34.5% in that time. What are the earnings expected to do in 2018?

2. Biogen (NASDAQ:BIIB) is trading with a forward P/E of 12.9. Year-to-date, the shares are down 8.4% but they’ve gained 28.5% over the prior 2 years. Estimates for 2018 have been cut in the last 60 days, but is there earnings growth?

3. Celgene (NASDAQ:CELG) has taken a beating this year with shares falling 27% year-to-date. It’s now trading with a forward P/E of just 9.2. That’s cheap. But is it a trap?

4. Lannett (NYSE:LCI) is the cheapest among this group. It has a forward P/E of only 5.3. Should you take a chance? Shares are down 31% year-to-date and have fallen 35% the prior 2 years.

5. Valeant (NYSE:VRX) has had its problems the last few years but the shares have rebounded in 2018 and are up 22% compared to the S&P’s return of 3.4%. It’s also cheap, with a forward P/E of just 8. Is this the bottom of the earnings decline?

There are lots of categories in the healthcare sector including the insurers, hospitals, device manufacturers, staffing and others.

But the drug companies have been hit especially hard.

Just because they’re cheap, however, doesn’t mean they’re a good buy. Investors need to do their homework.

Value stock or a trap?

Find out on this week’s podcast.

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