Actavis Leads the Way

NEW YORK (TheStreet) -- Some financial people do not really look at all the good things drug companies do. Instead, they focus on the creative destruction that happens when new replaces the old.

Think of all the popular brand names of the last decade: Rogaine, Plavix, Cymbalta, Oxycontin, Celebrex. It's a long list of exclusive money-making home runs now generic also-rans starring with a different label at a pharmacy shelf near you.

While lots of analysts like to pay attention to the pipelines full of miracle drugs of tomorrow, some companies do quite well with the miracle drugs of yesterday -- the generics.

Let's look at one: Actavis (ACT).

The past 15 months have been a dog fight for supremacy among three sectors: pharmaceutical, biotech and Internet. At the start of the new year, pharmaceuticals emerged at the top of my leader board.

Data from Best Stocks Now App

One pharmaceutical that has performed and continues to perform quite well is Actavis. It has been a Gunderson Best Stock Now for quite some time and continues to be.

Data from Best Stocks Now App

Headquartered in New Jersey, ACT is a $31 billion large-cap company that develops, manufactures and distributes generic and branded drugs for hypertension, elevated cholesterol, contraception and pain. It is  currently working on a generic NuvaRing, a contraceptive.

So let's talk about what has made ACT a Gunderson Best Stock Now.

Performance

First we start with performance.

Data from Best Stocks Now App

Over the past five years ACT has delivered nearly 49% per year to investors. The market has only delivered 15.6% during the same time. Over the last three years ACT has clobbered the averages again delivering almost 51% while the market averaged only 13.1%. During this past year when the pharmaceutical stocks have had jumbo performance, ACT is up nearly 106%.

ACT is currently one of the top-performing stocks in the entire market coming in with both performance and momentum grades of 'A'!

Stock Chart

We are not done yet.

The next filter that ACT has to pass through is technical. A chart is a great way of capturing and summarizing everything we know about a stock.


ACT had been going sideways for a period of about 10 weeks or so up until just this past week when I noticed the stock breaking out to the upside. I'll be watching to see just how far this ascent can carry it.

Valuation

But while I'm watching, let's use valuation as a gauge to come up with a five-year target price. Six- and 12-month target prices are too risky. If we're going to use five-year growth rates then let's use five-year target prices.

Data from Best Stocks Now App

When I take ACT's next year's earnings estimates of $12.83 and carry them out applying a five-year growth rate of 22% per year, I come up with a PEG ratio of 0.59. The PEG ratio compares the growth rate with the forward PE and anything under 1 is quite favorable in the growth investing world.

Furthermore, when I take those earnings of $12.83, grow them by 22% per year, and then apply a multiple that I think is appropriate, I come up with a five-year target stock price north of $300.

ACT has 89% upside potential. I like stocks that have at least 80% or more. ACT easily qualifies under my valuation requirements and comes in with a Gunderson Value Grade of 'B+'.

Data from Best Stocks Now App

Now let's rank performance and valuation together. I'm not a value nor momentum investor -- I'm both. I combine value, performance and momentum for finding stocks that are underpriced. This may be a tall order but it really narrows down the entire field.

But it's a big field. We only need to find 25 or so good ones. Out of 3,773 stocks in my Best Stocks Now! app, ACT currently comes in at #17. It is also a stock that I have a large position in in my conservative growth accounts.

At the time of publication the author had a position in ACT.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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