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Welcome to part three of Market Maneuvers—our special series to profit through market volatility.
Yesterday was a grueling day for Greek leaders, particularly Prime Minister Alexis Tsipras. As a member of the Syriza party, which was elected earlier this year because of their anti-austerity stance, Tsipras had the next-to-impossible task of convincing party members in parliament to vote for the Eurozone’s new bailout package.
Much of the party’s more than 200 members signed a statement that rejected the terms of the bailout, while opposition parties were ready to support the deal. Neither side is entirely excited about the terms, but all understand that the bailout is Greece’s final chance to avoid being booted out of the Eurozone and suffering an economic collapse.
So last night, Greece’s parliament approved the austerity measures, with a vote of 229 to 64 and six abstentions. As a result, this morning, the Eurozone approved a 7 billion euro bridge loan that will help keep the Greek economy afloat, and the European Central Bank increased emergency funding.
I must also add that the picture is growing bleaker for members of Greece’s ruling party. Finance minister Yanis Varoufakis was sacked last week, while deputy finance minister Nadia Valavani recently resigned. Energy minister Panagiotis Lafazanis and deputy labour minister Dimitris Stratoulis refused to back the bailout. So if Prime Minister Tsipras can hold onto his seat, we’ll likely see a shake-up in cabinet members in the coming days.
What’s interesting is that the global stock markets have relatively brushed off the Greece drama this week. Since last Wednesday’s routing, the S&P 500 and Dow have both bounced more than 3% higher. Even Fed Chair Janet Yellen’s comments yesterday that stated an interest rate hike is likely this year couldn’t derail the market. Maybe investors are finally starting to see that the Fed is all talk. An interest rate hike isn’t likely this year, and even if it does happen, key interest rates will remain near all-time lows.
In fact, there are three main reasons that I’m not looking for an interest rate hike this year: 1) Economic growth is recovering but consumers are not spending; 2) World events happening right now (i.e., Greece, China, etc.); and 3) No sign of inflation. Plus, the labor market is far from fixed, as wage growth does not exist. So I am still in the camp that the Fed will not raise interest rates this year—and that’s great news for the stock market.
Low interest rates will continue to fuel stock buybacks. Stock buybacks will continue to propel the market higher. And stocks with real earnings and sales growth will also continue to lead the market higher this second-quarter earnings announcement season. One group of stocks, in particular, is continuing to show relative strength and is set to really shine in the coming days and weeks…
Biotech & Biopharma Stocks Continue to Lead the Pack
If you’ve been following Market 360 and any of my other commentary this year, then you know I’m a big fan of biotechnology and biopharmaceutical companies. Really, most stocks in the healthcare field are ripe for the picking. And that’s because this sector has been red-hot this year.
Consider this: the iShares Dow Jones U.S. Healthcare ETF has climbed 13% higher so far this year. The iShares Dow Jones U.S. Pharma Index has soared 21% year-to-date. And the iShares NASDAQ Biotech Index has jumped nearly 29% in the past six months. Individual stocks in this industry have done even better. In fact, one of my top Emerging Growth stocks, an Irish biopharmaceutical, has seen its shares surge 173% year-to-date! So I’d say this is one sector worthy of a closer look.
According to Portfolio Grader, there are 349 companies classified as biotechs or biopharmaceuticals. On average, these companies earn a 2.6 grade in 2015, which is a solid B rating. This is up nicely from the 291 companies in 2014 that earned a C- rating.
So let’s dig deeper into the financials of two biotechs that are buys right now. One is a large-cap stock with a market cap of $172.36 billion, and the other is a small-cap stock with a market cap of about $888 million.
Our large-cap biotech is Gilead Sciences (GILD), a developer of treatments for life-threatening diseases. The company is most well-known for its expensive Hepatitis C treatments, Sovaldi and Harvoni. Currently, the company has exclusive agreements with CVS Health Corporation (CVS), Anthem (ANTM) and Aetna (AET) for its Hepatitis C treatments, and sales of these products have driven the Gilead’s results in recent quarters.
Thanks to about $4.45 billion in Sovaldi and Harvoni sales in the first quarter, Gilead Sciences posted a quarterly earnings and sales surprise. The company reported that earnings surged 94% year-over-year, while sales increased 52%. And the second quarter, to be announced on July 27, is looking to be another strong quarter: Analysts are expecting 14% annual earnings growth and 16% annual sales growth. Plus, estimates have been revised $0.32 higher in the past three months, which means another quarterly earnings surprise may be in the cards.
So it’s no wonder that Gilead Sciences earns straight As for sales growth, operating margin growth, earnings growth, earnings surprises, analyst earnings revisions, cash flow and return on equity. The only hiccup is earnings momentum, which has slowed down a bit and receives a D rating. Still, GILD earns an A fundamental grade and a B quantitative grade. That means GILD is a B-rated Buy.
The second stock I want to tell you about is Sucampo Pharmaceuticals (SCMP). It’s a little-known biopharmaceutical, only four analysts are following it, but it has explosive potential. The company is focused on the research and development of proprietary drugs to treat gastrointestinal, neurologic, ophthalmic and oncology-based inflammatory disorders. Its leading treatment is AMITIZA, which is used to treat chronic idiopathic constipation, irritable bowel syndrome and opioid-induced constipation.
Recently, the company received Fast Track Designation from the FDA for cobiprostone, a treatment used to prevent oral mucositis. This is great news, as Fast Track Designation expedites the development and review of treatments for serious conditions. And the FDA also accepted an Investigational New Drug application for a phase II clinical trial of cobiprostone.
In the first quarter, Sucampo Pharmaceuticals’ earnings surged a stunning 700% year-over-year, while sales increased 33%. The second quarter is lining up to be just as impressive: Analysts are looking for earnings of $0.16 per share on $31.85 million in sales, which translates to 300% annual earnings growth and 32% annual sales growth.
Given the strength of its sales and earnings growth, SCMP earns an A fundamental grade and an A quantitative grade. It receives A ratings for sales growth, operating margin growth, earnings growth, earnings momentum, analyst earnings revisions and return on equity. Earnings surprises earns a C rating, while cash flow gets a B rating. Overall, SCMP is an A-rated Strong Buy.
I’ll be in touch on Wednesday with your next Market Maneuvers, so make sure that you’re signed up to my mailing list before then. We’ll be covering the latest headlines and the best opportunities in the semiconductor sector.