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After a lackluster performance in 2016, the drug/biotech sector has shown promise since the beginning of 2017. With no major announcement related to drug pricing control since Trump’s election as President, investors are breathing a sigh of relief. Drug pricing controversy was one the major issues that hurt the industry last year.

The FDA is planning to streamline the review process for generics for speeding up approval. It suggested that instead of any direct measures for price control, the Trump administration is trying to control drug prices through competition. As the uncertainty clears, more and more investors are expected to put their money in biotech companies, pulling their shares up.

Meanwhile, the acquisition of Kite Pharma, Inc. by Gilead Sciences, Inc. (GILD - Free Report) for almost $11 billion has set the stage for further merger and acquisition (M&A) deals.  Also, the industry should benefit from tax reforms - once it makes its way through Congress. These reforms aim at allowing companies to bring back profits stored overseas at lower rates.

However, controversies and rumors surrounding scrapping of Obamacare and passing of Trump’s proposed health care bill persist. A report from the Congressional Budget Office estimates that abolishing Obamacare will increase the number of uninsured people, running into millions, which will affect the demand for expensive medical procedures and devices.

The rally is expected to continue on the back of an increase in demand for drugs due to a rise elderly population and prevalence of a wide variety of diseases. Drug/biotech companies are investing in developing innovative treatment with many clinical studies showing impressive results so far.

Favorable Industry Rank and Price Performance

The broader Drugs market is up 12.4% year to date, having outpaced the 11.5% gain for the S&P 500.

Two of the four Zacks industries — Medical-Biomed and Genetics and Large-Cap Pharma have outperformed the S&P 500 Index.

The Zacks Industry Rank is #96 (top 38% of the 250 plus Zacks industries) for Medical-Biomed and Genetics, #91 (top 36%) for Medical-Drugs, #56 (top 22%) for Large-Cap Pharma and #245 (bottom 4%) for Generic Drugs. Our backtesting shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

3 Undervalued Stocks to Add to Your Portfolio

Value stocks are those stocks, which are trading at a discount to their real value. The Value Style Score takes into account every valuation metric and condenses it into a single actionable score. It helps investors to identify undervalued stocks more accurately avoiding value traps. We have taken the help of the Zacks Stock Screener to select the stocks. To shortlist the stocks from the vast universe of drugs/biotech stocks, we have picked those which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Value Score of A or B.

Here are the stocks that fulfilled these criteria:

Jazz Pharmaceuticals plc (JAZZ - Free Report) is a biopharmaceutical company that has drugs like Xyrem for treating sleep disorder and Vyexos, which received approval for treating acute myeloid leukemia in August. The company is focused on expanding label for Xyrem its major source of revenues, to increase the target population. It carries a Zacks Rank of 1 and a Value Score of B. Shares of the company have gained 42.6% year to date, outperforming the industry. Its PEG ratio (P/E to Growth ratio) and Price to Sales (P/S) trail the industry whereas its earnings yield is better than the industry’s yield. This suggests the stock is undervalued.

PDL BioPharma, Inc. (PDLI - Free Report) is a biopharmaceutical company focused on acquiring and managing income-generating assets. PDL BioPharma has royalty agreements with several companies, whereby it has royalty rights on product sales. It carries a Zacks Rank of 2 and a Value Score of A. Shares of the company have gained 51.9% year to date, outperforming the industry. Its Price to Book ratio (P/B) and P/S trail the industry whereas its earnings yield is higher than the industry, indicating that it has more room to run.

Grifols, S.A. (GRFS - Free Report) is a pharmaceutical company, which mainly produces blood-plasma based products and is a leader in the segment in Europe. It carries a Zacks Rank of 2 and a Value Score of B. Shares of the company have gained 31.7% year to date, outperforming the industry. While the PEG ratio is on par with the industry, its P/S is trailing the industry. Its earnings yield is better than the industry’s, which suggests that the stock is undervalued.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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