Should You Bet on These Hot Healthcare Stocks?

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With a booming stock market, investors now face a plethora of choices. The rally in pharma and healthcare stocks, such as Gilead Sciences (NASDAQ: GILD), Cadence  (NASDAQ: CADX), and UnitedHealth (NYSE: UNH) has also been phenomenal in line with broader markets.

These stocks are surging on a mix of positive internal developments, as well as a robust showing of wider markets. Here is a closer look:

Shares of the California-based bio-pharmaceutical company, Gilead Sciences, have rallied more than 14% in the previous month and continue to look good. Like many other companies in the bio-pharmaceutical sector, it is really difficult to apply traditional valuation methods on Gilead Sciences and get positive results.

Having doubled in the last year, the stock is clearly overbought. It trades at a price to earnings ratio of nearly 36, which cannot be attractive. However, these very same factors can be used to justify high valuations. The company has been reporting encouraging updates on its drug development program.

Gilead Sciences has seen considerable success in the clinical development of GS-7977 (sofosbuvir) for the treatment of several Hepatitis C indications. While some of its clinical trials, namely Fusion, Positron, Fission, and Neutrino are all in late-stage development of sofosbuvir oral therapy, it recently announced receiving a positive review from the independent Data and Safety Monitoring Board for phase three trials for Genotype 1 Hepatitis C.

Earlier in the month, the company reported positive clinical results from its phase four type 2 diabetes evaluation of Ranolazine in subjects with Chronic Stable Angina.

Cadence on fire

Cadence is a biotechnology and drug development company with not very impressive results in the past. As a result, it has lost nearly half its value since 2009. However, the company seems to be back on investors’ radar, having gained 36% over the last month with a notable growth in trading volumes.

The jump has been sharper in the second half of March, after the company announced that its Ofirmev injection has been made available on the Veterans Affairs National Formulary. This move, in a single stroke, will boost the drug’s revenue in the range of $94 million to $100 million in 2013, up from $50.1 million in 2012.

This is substantial for a company which has a market capitalization of $572 million. It is no wonder that the stock received an “outperform” rating from JMP Securities, which recently started covering the company.

Not only drugs, insurance counts too  

UnitedHealth is another player in the healthcare industry which has outperformed the market. The company primarily operates as a health insurer and has recently acquired Brazilian health insurer Amil. The purchasing deal stands to greatly benefit UnitedHealth in expanding into the growing Brazilian private health insurer market.

This market, the biggest in Latin America, accounts for more than 200 million people. With the acquisition, UnitedHealth has become the first major foreign health insurance group to enter the Brazilian market. This deal is not new, and has been cleared by antitrust authorities, but smooth progress on the acquisition seems to be boosting investors’ confidence in UnitedHealth, which has gained more than 7% in the last one month.

Trading at $57, the stock is valued at nearly 11 times its 12-month earnings. Analysts at Oppenheimer have an “outperform” rating on the stock with a target price of $66, indicating potential upside of 15% from current levels.

The bottom line

Making a call on healthcare stocks is probably one of the most difficult tasks in the stock market, but investors would do well by keeping an eye for early signs of a fatigue in the rally. However, at least for UnitedHealth and Gilead Sciences, the rally seems to just have begun.


Jacob Wolinsky has a position in UNH. The Motley Fool recommends Gilead Sciences and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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