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:
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.
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%.