Biotechs: A Trading Opportunity?
It took just a week for the short-term outlook on Medical-Biomed/Genetics to improve.
Last week, I remarked how the group's revision ratio was nothing to write home about. Among biotech companies, there were 101 positive revisions and 100 negative revisions to 2009 earnings estimates made over the past 4 weeks.
I'm happy to say that the ratio has improved to 144 positive revisions and 127 negative revisions. This revisions ratio of 1.13 helps to make Medical-Biomed/Genetics one of the 10 best-ranked industry groups.
Myriad Genetics, Inc. (MYGN - Analyst Report) is perhaps the most notable. Reiterating what I said last week, the company topped fiscal second-quarter expectations by 10 cents with profits of 43 cents per share. It was the second quarter of profitability. Total revenues increased 48.7% to $84.4 million, driven primarily by an increase in sales and marketing efforts.
The number of positive earnings estimate revisions has improved. Since MYGN reported, 10 of the 13 covering brokerage analysts raised their fiscal 2009 profit projections. The positive changes pushed the consensus earnings estimates 29 cents higher to $1.71 per share.
The positive revisions signal that the stock should outperform the S&P 500 (SPX) over the next 1-3 months.
As an added bonus, Zacks Equity Research senior analyst Grant Zeng thinks the stock is also a good long-term investment. He has a buy recommendation with a price target of $100.
Among other stocks that Grant regards as long-term buys, earnings estimate revisions make Sangamo Biosciences, Inc. (SGMO - Analyst Report) and ZymoGenetics, Inc. (ZGEN - Snapshot Report) potentially bullish short-term trades.
SGMO delivered its second consecutive positive surprise with a loss of 6 cents per share; the consensus estimate had called for a wider loss of 15 cents. Revenues totaled $6.8 million. The good performance came from enabling technology agreements in cell line engineering for protein production.
SGMO believes it can end 2009 with a cash balance of at least $45 million. Since this signals a lower cash burn rate than was expected, the majority of the 9 covering brokerage analysts positively revised their 2009 loss projections. The consensus estimate now calls for a per share loss of 55 cents per share, a 10-cent improvement from the average forecast of a month ago.
ZymoGenetics topped expectations by 33 cents with a fourth-quarter loss of 13 cents per share. Revenues totaled $36 million thanks to RECOTHROM, a treatment for moderate bleeding during surgery and was approved by the FDA in January 2008. A more competitive pricing structure helped to drive demand.
ZGEN believes net RECOTHROM sales could be in the range of $25 million to $35 million this year. Factoring in additional revenues from collaborations, licenses and royalties plus expenses, the company thinks this year's loss will total between 80 cents and $1.09 per share. This projection was far better than the $1.56 per share loss brokerage analysts had been expecting. (Positive revisions by nearly all of the 9 covering brokerage analysts have lowered the consensus earnings estimate to 95 cents per share.)
Outside of Grant Zeng's coverage, Cytokinetics, Inc. (CYTK - Snapshot Report) and Xenoport Inc. (XNPT - Analyst Report) also recently reported better-than-expected earnings.
It is important to realize that biotech earnings are generally driven by company-specific factors. However, since these companies have a lower level of economic sensitivity, the bullish earnings news gives them a chance to stand out as potential trading opportunities in the current market environment.
CYTK and MYGN are Zacks #1 Rank ("strong buy") stocks. SGMO, XNPT and ZGEN are Zacks #2 Rank ("buy") stocks. (ZGEN was also a top performing stock last week.)
The Zacks Rank is fundamental timing indicator that only factors earnings estimates revisions and earnings surprises. It is not influenced by chart patterns or business models.
Related ETFs
There are several ETFs focused on biotech stocks, including PowerShares Dynamic Biotech & Genome Portfolio (PBE), First Trust AMEX Biotechnology Index Fund (FBT) and iShares Nasdaq Biotechnology Index Fund (IBB). There is overlap in holdings, so investors should be careful when holding more than one biotech ETF.
Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.
| Sector Rank as of Feb 18 | ||||||
| Sector | This Week's Zacks Rank | Last Week's Zacks Rank | FY09 Revisions Ratio | FY09 Estimates Revised Up | FY09 Estimates Revised Down |
|
| Medical | 2.57 | 2.58 | 0.73 | 475 | 655 | |
| Utilities | 2.89 | 2.83 | 0.29 | 67 | 231 | |
| Computer and Technology | 2.91 | 2.89 | 0.29 | 554 | 1911 | |
| Retail-Wholesale | 2.97 | 2.94 | 0.50 | 257 | 511 | |
| Aerospace | 3.00 | 2.98 | 0.32 | 44 | 139 | |
| Consumer Discretionary | 3.02 | 3.06 | 0.22 | 113 | 511 | |
| Consumer Staples | 3.04 | 3.02 | 0.27 | 109 | 410 | |
| Business Services | 3.05 | 3.00 | 0.29 | 52 | 178 | |
| Transportation | 3.17 | 3.16 | 0.22 | 95 | 426 | |
| Construction | 3.17 | 3.17 | 0.21 | 41 | 194 | |
| Industrial Products | 3.22 | 3.24 | 0.14 | 58 | 408 | |
| Oils-Energy | 3.24 | 3.23 | 0.24 | 245 | 1016 | |
| Basic Materials | 3.24 | 3.28 | 0.19 | 80 | 424 | |
| Auto-Tires-Trucks | 3.25 | 3.31 | 0.05 | 7 | 138 | |
| Conglomerates | 3.25 | 3.21 | 0.08 | 7 | 93 | |
| Finance | 3.26 | 3.26 | 0.14 | 299 | 2113 | |
Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.