(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of Regeneron Pharmacuetcls Inc. (REGN ), Incyte Corp. (INCY) and Tesaro Inc. (TSRO) have had a terrible start to 2018, with shares down by 14% or more. To make matters worse, analysts have been aggressively cutting the price targets on each and lowering estimates for the companies. It could be a sign that there are still more declines in store for these stocks, because to this point the analysts' forecast and price targets have proven to be too aggressive.
Since the start of 2018, shares of Regeneron have fallen by more than 14%, while Incyte has fallen by over 28% and Tesaro has fallen by over 32%. These three stocks have significantly underperformed the broader market and the sector, with the S&P 500 down by only 1.2% on the year and the iShares NASDAQ Biotechnology ETF (IBB) down by only 1.35%.
Shares of Regeneron have performed the best of the three biotechs since the start of the year, but looks can be deceiving. Regeneron shares are nearly 40% off their one-year highs, with the stock currently trading at roughly $325, down from a high of approximately $525 in June 2017. But analysts on average have only lowered their price target on the stock by 18% over the same time, dropping it to $414, from $503 in the middle of October 2017. Meanwhile, analysts have cut their earnings estimates by roughly 20%, from $22.77 in early 2016, to $18.24 currently.
Incyte shares have fallen hard since April 6 after failed trial results for one of its drugs. But investors appeared to have done a far better job predicting the poor outcome than analysts, because the stock has fallen by nearly 55% since March 2017, while analysts left their price target unchanged, only lowering it after the disappointing trial results. But what seems most interesting is that despite price targets staying firm, earnings estimates have been aggressively cut since the beginning of 2017. While they once stood at nearly $1.55 per share, by the time April 2018 had arrived, those estimates had fallen to breakeven, $0.00 per share.
Tesaro shares are down by over 71% since February 2017, and like the others, analysts outlooks were far too aggressive, and even with the massive declines, analysts are still average are still looking for shares to jump by 81% to $97.50, from its current price around $53.50. And like the other stocks, analysts have been aggressively cutting their earnings outlook as well, from a loss of $2.50 at the start of 2017 to a loss of nearly $8.80 per share presently.
In these three cases, analysts' price targets appear to still be too aggressive given the sharp earnings downgrades over recent years and given steep stock declines. Then again, those earnings could swing the other way and start rising, helping to lift the stock prices, but as history has shown, analysts have too often been far too aggressive.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.