Louis Navellier sent out an email ad on Sunday telling us that we would see the stock he’s naming in his current Emerging Growth newsletter double “in the blink of an eye.” And you know, despite the fact that I know better (he makes essentially the same promise, throwing on that this will double “with or without you,” at least once a month), I still can’t help but want to figure out what this “guaranteed” doubler is.
Here’s the actual promise from the first part of the email ad:
“This Backroom Drug Deal Delivers Your Next Double —With or Without You
“All thanks to the new health reform law that gifts up to $35 billion to drug companies over the next 10 years!
“Buy the drug company named in tonight’s issue of Emerging Growth, and you’re going to see this $17 stock jump to $34 in the blink of an eye.”
See what I mean? You might be wise enough to actually research the stock first, or end up thinking it’s a terrible idea, but if you hear a promise like that, well, you can’t help but get curious.
Which, of course, is why you’re here — and why I’m here, manning the turrets at Gumshoe Castle. So what is this little goodie that’s been catapulted over the wall? Let’s dig into the details and see.
“The company is about to become one of the biggest beneficiaries of the President’s health reform—thanks to the backroom drug deal his minions cut with generic drug companies that gifts them as much as $35 billion over the next 10 years!
“How can this be?
“1. Because generic companies not only get to keep their lucrative pay-for-delay settlements from brand drug-makers that’s worth an extra $35 billion to profits in the next 10 years…
“2. …but they also get to profit from increased health coverage that will throw billions of dollars in new prescriptions their way.
“As a result of this HUGE double win, my No.1 company’s sales and earnings will continue to shoot through the roof, not only from future settlements to keep generics off the market but also from lucrative contracts with brand-name behemoths like Novartis, Wyeth, Schering-Plough and Leiner Health Products.”
OK, so we get a few of their clients, and a sense of what the business is. There are several fairly large generic drugmakers, though, so some more detail would be helpful as we narrow down to Louis’ selection …
How about this:
“… last quarter’s 5,825% earnings growth, 448% sales growth and 12-month 121% investors’ profits are just a drop in the bucket to the kind of money this generic drug maker will make in 2010.”
And this, just in case you thought you had time to think it over and do some mulling:
“The Biggest Profits Will Come in the Next 3 Days
“That’s because the company’s earnings will be released on August 3rd.”
And as has become typical in all of Navellier’s ads of this stripe, he also runs down the institutional investors and implies that they’re just lining up for a breakout quarter:
“If you wait until earnings reports settle in, this $17 doubler could have already hit $34.
“I’m not alone in my thinking.
“Fidelity, Vanguard, Hartford, iShares and five other small-cap funds have plunked down more than $100 million.
“And that’s just on the mutual fund side.
“On the institutional side, managers have been even more aggressive, where Vanguard Group, BlackRock, Wellington Management and others have together plunked down nearly $200 million…
“…all in anticipation of the profit wave that’s headed their way.”
So that’s enough, right? Well, I would have metaphorically crumpled this article up and tossed it in the wastebasket if it wasn’t, of course … but yes, the mighty, mighty Thinkolator needed only a few cycles on “ice crush” before spitting out the answer to this puzzler:
Impax Laboratories (IPXL)
And yes they really did turn in those ridiculous year-over-year growth numbers in the most recent quarter (449% sales growth and 5,825% earnings growth), so that’s pretty impressive. And analysts, according to Yahoo Finance, have been wildly off on this stock — the last two quarters both beat earnings estimates by at least 300%, which is ridiculous (the two quarters before that were also way off, but nowhere near 300%) … so that means we should take any analyst estimates with big ol’ hunk of salt, I’d say, but those analysts do believe that earnings will drop next year, and quite dramatically (analysts expect $3.28 in earnings per share for calendar 2010 — which seems quite do-able since they earned over $2 in just the first quarter — and $1.50 for 2011).
So they’re putting together huge growth numbers, but either that big $2 quarter this year and their great quarters last year were due to some one-time events, or something else is going on that has analysts expecting that growth trend to stop abruptly in the very near future. Whatever it is, it’s not enough to put a chink in their armor according to Navellier’s data-watching system, which focuses a lot on earnings beats, earnings momentum, and analysts revising their estimates upward — all of which have been true for Impax over the last few months.
And the numbers have looked very good for Impax for quite a while — they’re far smaller than other generic drug companies like Teva Pharmaceuticals or Mylan Labs, but they’re not teensy (market cap is about $1 billion, annual sales over $600 million), and their numbers generally stand out as significantly above average in the pharma sector, their trailing PE is shockingly low, largely due to that huge first quarter, and their price/sales ratio, margins, and growth rates all make them stand out. So why do they look so cheap, and why didn’t the stock take off and stay airborne? (The last quarter clearly helped and the stock climbed to near all-time highs of $21 or so, but it came right back down to $17 or so, which is where it was before that quarter).
Well, at least for now investors seem very cautious because that big blip in the first quarter was largely due to their eight-week window of exclusivity to market their generic version of Flomax. That window when a drug first goes off patent can be very lucrative for the generic companies who get their version out first, or who have some kind of deal with the patent owner to ease it into the generic space with an exclusivity arrangement, so earnings for these kinds of companies — especially Impax, since they’re relatively small — can be quite “lumpy.” They do have a pipeline, they have a specialization in creating time-release variations of drugs, which helps them differentiate their products and latch on to existing products, and they have an arrangement with Shire to do something similar to the Flomax deal for Adderall’s generic formulation, so it’s not like they’re going to stop making money — but clearly investors and analysts are hesitant to “price in” any growth from future deals or drugs, especially because the “windfall” period before serious generic competition sets in can be quite brief.
So that’s why we get a trailing PE of 5 and a forward estimated PE of 11 — Navellier’s system often seems to flag these kinds of stocks that analysts and investors think are in a bubble of unusually high sales, and sometimes they work out and do keep up their momentum (and sometimes folks are right that it is a bubble, or least a souffle, and it does let some air out over time).
I can’t tell you what will happen this time, of course (if I could, I’d be far too busy polishing my garage of Ferraris to write to you), but I can tell you that this is the stock Navellier’s pegging for a double to $34 in the near future — do you think he’s right, or woefully misguided? Let us know with a comment below.