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The biotechnology and pharmaceutical stocks have seen some tough times of late, especially Editor’s Portfolio holding Bristol-Myers Squibb (BMY)
The stock is down 25% since mid-February and is trading around its lowest level in a year. The shares are being buffeted by a number of factors. First, Wall Street continues to worry that the constant political rhetoric about high drug prices will eventually lead to price controls.
Second, Bristol-Myers has been lagging in a race to develop a treatment for advanced lung cancer. The firm recently reported positive news on a treatment for advanced lung cancer involving a combo therapy of two Bristol-Myers drugs — Opdivo and Yervoy.
The trial results showed the combination reduced the risk of cancer progression or death by 42% when compared to chemotherapy. However, competitor Merck (MRK)
The price decline has made these shares a lot more attractive from a valuation standpoint. The stock now trades at 16 times 2018 consensus earnings estimate of $3.26 and less than 14 times the 2019 estimate of $3.73. The price decline has also boosted the yield to 3%.
I have owned Bristol-Myers Squibb stock for many years, and the stock’s history has been one of large downdrafts and big upswings. This latest downdraft feels a bit overdone to me.
True, Bristol-Myers is facing tough competition in the lung cancer market, but assuming that this huge market will be a winner-take-all situation is probably a mistake. Buying a stock on bad news and in a sector that has been seeing plenty of turmoil is not for weak stomachs.
But it is not a reach to see Bristol-Myers posting a total return of at least 10% from current levels over the next 12 months. The other factor that could play a role in boosting the valuation is the takeover activity in the group.
Although Bristol-Myers’ market cap is around $83 billion, it is not a stretch to see the firm merging with another drug company. Consolidation has been happening at the lower end of the market-cap spectrum in the biotechnology space, and it wouldn’t surprise me to see takeover activity in the sector start to head up the market-cap ladder.
Bristol-Myers Squibb offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company.
Chuck Carlson is editor of DRIP Investor.
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