Stock of the Week: Opportunity in a Beaten-Down Pharma Player?

|April 14, 2023

Healthcare is one of the few industries that is sure to grow for years to come. It’s not like we’re going to stop spending on our health.

But knowing which companies will be part of that growth is far trickier to figure out.

That’s where my proprietary GVI algorithm comes in.

And this week, I’ve set its sights on a reader-requested stock.

This multinational biopharma company has strong annual earnings growth.

But we also need to look at revenue and profits… and there are a few red flags.

So should investors steer clear of this stock… or is there a glimmer of hope for future returns?

Get all the details in this week’s Stock of the Week.

Click on the image below to watch it.



Hi, Manward family. Another Stock of the Week… and this one is a special one because it comes from one of my readers. Really pleased to do this one.

I’m Alpesh Patel, as you know, the CEO of a hedge fund and asset management company.

This week’s Stock of the Week is Opko Health (OPK). It’s a multinational biopharmaceutical and diagnostics company that seeks to establish industry-leading positions in large, rapidly growing markets by leveraging its discovery, development and commercialization expertise and its novel and proprietary technologies.

The company is a merger from back in 2007, amongst a group of companies in these spaces. It’s a diversified healthcare company because it’s present in more than 30 countries. I like that.

It has historical annual earnings growth that’s strong. Revenues, profitability and growth, however, are the factors that we need to focus on.

So let’s have a look at some of those factors.

Unfortunately, on my Growth-Value-Income (GVI) rating, it only comes in at a 2. Remember, this is a proprietary algorithm I use to evaluate companies by weighing their value – so their share price relative to profitability – their revenue growth, dividend yields, cash flow and so on. This only ranks a 2 out of 10, so it wouldn’t meet my criteria there.

Similarly, on a CROCI basis, it’s got negative cash return on capital invested: -5.8%. Now, remember, CROCI was invented by Deutsche Bank and then used by Goldman Sachs Wealth Management for its wealthiest clients. What they found is companies in the top quartile tended to perform the best. More details on this at the link here. This company isn’t in the top quartile, the top 25%, so another worrying factor.

There hasn’t been much price momentum in the recent past either. However, Sortino – the average return versus volatility, or risk, of missing it – is not too bad. But volatility is high, and it’s been underperforming the market, as shown by alpha.

So a lot of things which concern me with this viewer pick Stock of the Week.

Turnover is somewhat erratic. Certainly profitability and pretax profits are not moving in the right direction. Assets are moving in the wrong direction. Borrowing has increased and remains elevated. Cash flow, as I’ve already hinted, is a bit of a concern as well.

When we look at the stock price, it’s fallen and has been falling substantially, but it might have hit a base. If I’m looking at positives with this, I’d say it looks like it’s hit something of a base. There’s not much further it could fall lower. So if you take the position that the most you are risking is 100% of your capital – let’s assume it’s not going to go bust, but you might lose, say, 50% – then if it can go from where it is now back to where it was at the start of last year, you’d get 100% upside.

So you can see on a reward-to-risk basis, you could argue it’s not too bad.

Again, if I’m looking at positives, we have on a discounted cash flow basis a fair value of about $4. That doesn’t mean it will achieve it by any means, and discounted cash flow is not the only way to measure the value of a company. But it gives you some glimmer of hope of why it might be able to get to $3 and give you that 100% return.

In terms of volatility, I look at the return histograms. These are a measure of, given how the price has moved in the past, the probabilities of the ranges it could move in the future. You can see there’s a lot of potential downside, which is why I said -50% is where you could end up finding yourself, which is why you’d want that 100% to the upside.

So a few glimmers of hope… but definitely in the speculative, high-risk category with this one. However, from existing levels, it would be one of those where you would, I guess the term would be, you’d have to take a “punt,” or a high-risk investment in this, were you to get in.

But like I said, some silver linings.

Hopefully you found that helpful and it was educational, informative and, I hope, interesting as well.

So thank you, Manward family, and of course my GVI Investor followers as well.

Thank you one and all.