2018 Outlook: Biotech Stocks Looking Strong for Value and Growth Investors

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With 2017 coming to an end, investors are wondering how they should be investing for 2018 and beyond. At the start of December, the Dow was up just over 20% and the S&P 500 was up almost as much. The S&P Biotechnology Select Industry Index was last seen up about 30% so far in 2017, but the problems in the biotech segment have been numerous.

When 24/7 Wall St. reviews its waves of outside research notes each morning, a growing trend is becoming impossible to ignore: analysts keep raising price targets while the amount of anticipated upside keeps shrinking. This matters in all sectors, but it is very important for investors to understand the risk versus upside when it comes to emerging pharma and biotech stocks. Fortunately, analysts in general are more positive than cautious about biotech in 2018.

At the start of 2017, most Dow and S&P stocks with new Buy and Outperform analyst ratings seemed to come with average targets of 10% or 15% for most sectors. At the end of 2017, that implied upside is usually less than 10% projected total returns, after factoring in gains and dividends. Most of the larger biotechs have upside projections of more than 10% for the coming 12 months, and some of the recent biotech sell-offs may bring far more upside if the pool of analysts is correct.

The bull market is now nearing nine years old. After the gains in the broad market, and the late-2016 gains after the election, it is now frequently the case that investors are seeing reiterated ratings come with even just 5% or 6% upside. That can be far higher in the emerging biotech companies with no long history of drug sales, but investors in biotech need to consider whether there is enough projected reward that comes with Buy and Outperform ratings in the well-heeled and established large cap biotechs.

24/7 Wall St. has focused on the outlook for biotech valuations and implied upside in 2018. The overall stock market valuations are high, but not at nosebleed levels of past bubbles. Biotech valuations are in many cases looking quite cheap, and even many of the established names would show up in most value investor screens. Then again, when biotech investors are looking at “value” they sometimes find that they are in a value trap.

Biotech investors have many risks. There is a current pledge to get drug prices lower, but that has often been ignored in biotech of late. The larger biotech companies are also expected to crank up their view on mergers ahead, adding to future drug pipelines. That could put a slew of $500 million to $5 billion values up for grabs, though these companies mentioned here would be the most likely acquirers rather than the acquisition targets.

Investors often use the Thomson Reuters consensus analyst target price as a gauge of whether there is implied upside in a stock. This takes out the bias and noise from one very positive analyst or from one very cautious one. This has been used for implied upside and for forward valuation metrics.

It is no secret that biotech stocks can bring great rewards for investors. They can also deliver serious pain. It is for this reason that most investors should simply demand more upside from biotechs than should from utilities, 50-year-old drug companies, technology giants, banks and financials, and broader industrials. Fortunately, most of the big biotech and biotech-related stocks valued at about $20 billion on up are currently projected to deliver a solid 2018.

Amgen: A strong 2017 may look more muted in 2018.

Amgen Inc. (NASDAQ: AMGN) was last seen up 22.2% so far in 2017, and it is valued at 14 times forward earnings. Its dividend yield is also better than 2.5%. If analysts are correct, the expected total return for the coming 12 months would be about 9%.

Shares of Amgen closed most recently at $178.67, compared with a consensus analyst target price of $190.55. The 52-week trading range is $138.83 to $191.10, and the market cap is $129.7 billion.

Gilead Sciences: Is it value or a value trap?

Gilead Sciences Inc. (NASDAQ: GILD) has given shareholders a total return of about 2% so far in 2017, but that has been only because of its 2.8% dividend yield. Gilead shares are currently well under former highs and the stock is valued at only 8.5 times forward earnings. The stock almost always comes up on every value screen imaginable, but that is because sales have flattened. The recent acquisition of Kite Pharma is still being integrated into analyst models. If those analysts are correct, the implied total return would be about 20% for the coming year.

Shares of Gilead closed at $73.29, with a consensus target price of $85.70. The 52-week range is $63.76 to $86.27, and the market cap is $95.7 billion.