(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of Biogen Inc. (BIIB), Gilead Sciences Inc. (GILD) and Amgen Inc. (AMGN) have fallen so far from their highs this year that they now look like a bargain. But these stocks are cheap for a reason. Every attempt by these three stocks to rally in recent weeks has been met with a wave of selling pressure, and they are now poised to fall even lower, according to technical charts and fundamental analysis.
Investors buy biotech stocks for growth, not value, and the earnings and revenue outlook for these three stocks is extremely weak, which will put downward pressure on these shares. The causes for investor caution also include failed drug trials, pipeline concerns and pricing pressure on drug products.
The three biotechs have seen revenue plateau in recent years, and the outlook for future revenue is non-existent. In fact, analysts are looking for Gilead's revenue to decline by 18.5% in 2018 to $21.299 billion from $26.107 billion in 2017, while earnings are expected to fall by 26% to $6.46 from $8.84. That declining growth is one of the primary drivers for the stocks cheap forward P/E multiple of 11.6.
It doesn't get much better for Biogen, with revenue only expected to climb by 5.8% in 2018 to $12.98 billion, while earnings are forecast to rise by 13.8% to $24.82 per share. But 2018 isn't the problem for Biogen; it is 2019 and 2020, when the revenue and growth rates slow even further. Revenue is only expected to climb by 3% in 2019 and 3.5% in 2020.
Even the technical chart shows there may be more downside risk in Biogen's stock. A March 13 Investopedia article noted the Biogen was sitting on a critical support level around $280. Shares attempted to rally, but a wave of selling resulted in the stock breaking support, and now the stock is at risk of falling to $250.
Amgen's outlook is even worse than Biogen's when it comes to revenue projections. Revenue in 2018 is expected fall by 1% to $22.64 billion and rise by 0.25% in 2019 and 1.5% in 2020, while earnings are only expected to grow by 4% to 5% in 2019 and 2020. Meanwhile, Amgen's technical setup shows the stock is at risk of falling as well, with the stock sitting on a critical technical support level at $169. A fall below that support sends the stock toward $152, a drop of over 10%.
The Odd Twist
But in an odd twist, analysts are actually very bullish on the three stocks and see huge gains. In fact, according to data from Ycharts, the average analyst price target on Biogen is over 40% higher than the stocks current price of around $270 while Amgen's is nearly 15% higher than its current price around $171.
It is true that investors are always looking to the future to see how a company will perform, and perhaps that is why each company is currently so cheap and is actually at risk of getting cheaper.
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.