Strong improvement potential in companies can be evaluated by measuring the trailing P/E ratio against he forward P/E ration. In the event a company is undervalued as result of harsher earnings estimations as a result of a weak past performance or another reason, that stock may present the possibility for significant earnings.
Companies that fall into this category include:
Merck & Co. (NYSE: MRK)
Merck hasn’t been performing at its best for sometime; however the pharmaceutical and healthcare company offers a huge range of products and has a number of other promising ones in development. For quite a while the company has been relying on patents and sales of existing drugs but that could change as the patent on Singulair, the company's highest grossing drug, responsible for nearly $5B of its 2010 profits expires next year. The year after that 5 other big sellers will expire, meaning the company is rushing to release an arsenal of new drugs that could be potential profit makers. This stock is a risk but the pipeline is strong, with several making it as far as Phase 3 trials and a promising Hepatitis C drug currently in late stage review. They are also working on drugs for other illnesses that have long evaded treatments including migraine, osteoperosis, Parkinson’s Disease and Diabetes.
The drugs address a wide array of problems including allergy, asthma, cervical cancer, diabetes, fertility, migraine, osteoporosis and Parkinson's Disease. 2010 was laden with restructuring costs for the company which shook revenue numbers and led stock prices down. 2011 will have less of that to contend with, offering more promising numbers to investors and possibly driving share prices up.
Dendreon Corp. (NASDAQ:DNDN)
Dendreon Corp has been garnering a lot of attention from analysts, largely because the biotech company has a very interesting drug in its pipeline. Provenge a prostate cancer treatment is estimated to bring in as much as $1 Billion to the company by next year. If that happens, not only will the company break into the black but multiply from $48 million last year to as much as $400 million. Still, as often happens in late trials, drugs that seem promising can miss the mark or fail FDA inspection for another reason. Investors attracted to high risks and high returns may be interested in Dendreon but safety is a major issue here. The company has a forward P/E of 134.28.
Total S.A. (NYSE: TOT)
Total is an integrated international oil and gas company that has been rallying significantly of late. The company has diversified operations spanning more than 130 countries where it engages in everything petroleum related from Upstream to Downstream Operations as well as natural gas and petrochemical production. Total has a 4.4 percent dividend yield. In addition, the company is poised for growth since it signed an agreement with EDF ENR to purchase all of Tenesol's solar energy operations. The company is positioning itself to be a major powerhouse by extending itself in all market. Tenesol is already is a leader in France, where alternative energy is stressed, for providing major industrial and commercial photovoltaic rooftop solar application. The deal is expected to be finalized in the second half of this year though it remains subject to legal evaluation.
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