Customer Service 1 (888) 261-2693
Advanced Search

Five Ways to Trade Now That Genentech's Gone

By Dr. George Huang
Friday, April 3, 2009

What would you do with $47 billion in cash?
 
That's the question a few portfolio managers are asking themselves right now. You see, Swiss drug giant Roche just completed its long-awaited buyout of biotech pioneer Genentech. The buyout handed $47 billion in cash back to Genentech shareholders. (If you took my advice back in November, you should have grabbed about $20 a share yourself.)
 
Most of Genentech's top 25 shareholders are growth mutual funds. According to their investment mandates, these funds need to allocate this cash back into growth-oriented industries. And in this terrible economic environment, the only industry with any growth left is health care.
 
Out of 938 companies with $1 billion market cap or more, health care was the only business that eked out positive earnings growth (11%), according to Thomson Reuters. Biotech grew earnings at an even faster pace: 21%, the best showing in all health care segments. Compare that with financials, where earnings went negative by 400%+. Consumer discretionary and the materials sector saw earnings drop close to 100%.
 
That's why I expect at least half of the Genentech buyout money – roughly $25 billion – to "recycle" back into biotech. (The other half will likely end up in shares of the hapless Big Pharmas.)
 
That's big money for a $250 billion industry, especially when you consider it's likely headed for just a handful of the best prospects. Here are five companies I believe will receive most of the recycled funds:
 
Company
Market Cap
Growth Rate
Projected P/E
for 2009
Gilead (GILD)
40 billion
18%
19
Teva (TEVA)
40 billion
14%
14
Celgene (CELG)
18 billion
30%
20
Cephalon (CEPH)
4.5 billion
15%
12
Shire (SHPGY)
7 billion
10%
12
 
Gilead has a dominant franchise in HIV treatment. Its drugs have turned HIV from a death sentence into a chronic disease. As a result, Gilead churned out remarkably consistent revenue and earnings growth in the last decade, making it a favorite among large-cap growth investors.
 
Teva is the largest and the most profitable generic drug maker in the world. As President Obama attacks high health care costs, generics use will increase and Teva will continue to earn record profits.
 
Celgene (cancer), Cephalon (neurological diseases), and Shire (rare genetic disorders) are three biotechs that often land on analysts' buyout lists. Their small market caps make them ideal targets for Big Pharmas like Eli Lilly, Sanofi, and GlaxoSmithKline.
 
With the "top dog" in biotech gone, growth mutual funds will look to park their windfall profits somewhere. The buying spree can push biotech valuations up 20%-30% or more from current levels. To beat them to the punch, start your research with these five names.
 
Good investing,
 
George Huang




In The Daily Crux Recent Articles
Market Notes
Possible construction rebound... engineering software maker AutoDesk surges climbs 50% in 18 days.
 
Nearly bankrupt casino giant MGM rockets 30% on talks with buyout firm.
 
Huge oil services rally yesterday... most up at least 8%.
 
Emerging markets blasting off to new six-month highs... Brazil and China leading the way.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%