Jim Cramer's Five Best Stock Picks for the Biotech Sector

NEW YORK (TheStreet) -- As the stock market wraps up a record-breaking year, TheStreet's Jim Cramer has selected 12 sectors where he thinks investors should put their money.

Among them is biotech. Biotech stocks are up 33% this year, as measured by the Nasdaq Biotechnology Industry Index, while the S&P 500 is up 11%. In each of Cramer's 12 sectors, "you can almost throw darts and win, with a couple of rare exceptions," he wrote in Here Are 12 Sectors to Bet On on the Real Money Web site.

Biotech stocks specifically have had a "monstrous" year, Cramer wrote. "You really don't want to out-think this. We have senior and junior biotechs that work."

We've listed Cramer's picks alongside the TheStreet Ratings, TheStreet's proprietary stock rating tool which projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 30 major data points, TheStreet Ratings uses a quantitative approach to rating stocks. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Cramer's analysis and that of TheStreet Ratings may differ as Cramer judges for himself the expected value of each company's biotech pipeline without regard to time horizon, while TheStreet Ratings uses consensus estimates for the next 12 months only. In addition, changes in TheStreet Ratings may lag Jim Cramer's analysis, as consensus estimates may take some time to change meaningfully.

Here are Cramer's top five picks for the biotech industry.

Celgene

Large-cap biotech Celgene (CELG) is most notably known for its cancer drugs, such as Revlimid for multiple myeloma, a form of blood cancer. However, the Summit, N.J.-based company has more recently expanded into auto-immune diseases with Otezla, which was approved by the U.S. Food and Drug Administration last March for psoriasis.

Market Cap: $91 billion

52-week high: $114.84 on Nov. 28

52-week low: $66.85 on April 15, 2014

Year-to-date Return: 34%

TheStreet Ratings team rates CELGENE CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate CELGENE CORP (CELG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, notable return on equity, solid stock price performance, growth in earnings per share and expanding profit margins. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Powered by its strong earnings growth of 40.22% and other important driving factors, this stock has surged by 37.79% over the past year, outperforming the rise in the S&P 500 Index during the same period. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.
  • CELGENE CORP has improved earnings per share by 40.2% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, CELGENE CORP increased its bottom line by earning $1.69 versus $1.65 in the prior year. This year, the market expects an improvement in earnings ($3.70 versus $1.69).
  • CELG's revenue growth trails the industry average of 40.4%. Since the same quarter one year prior, revenues rose by 18.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Biotechnology industry and the overall market, CELGENE CORP's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • The gross profit margin for CELGENE CORP is currently very high, coming in at 96.45%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 25.65% trails the industry average.

Regeneron Pharmaceutical

Biopharmaceutical company Regeneron Pharmaceutical's (REGN) biggest-selling drug is Eylea, approved to treat a variety of eye diseases. The Tarrytown, N.Y.-based company has a large pipeline of experimental drugs, highlighted by the cholesterol-lowering therapy Alirocumab.

Market Cap: $41 billion

52-week high: $419.27 on Nov. 19

52-week low: $257.69 on Dec. 18, 2013

Year-to-date Return: 48%

TheStreet Ratings team rates REGENERON PHARMACEUTICALS as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate REGENERON PHARMACEUTICALS (REGN) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • REGN's revenue growth trails the industry average of 40.4%. Since the same quarter one year prior, revenues rose by 21.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • REGN's debt-to-equity ratio is very low at 0.22 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 4.80, which clearly demonstrates the ability to cover short-term cash needs.
  • Compared to its closing price of one year ago, REGN's share price has jumped by 40.90%, exceeding the performance of the broader market during that same time frame. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
  • Net operating cash flow has significantly increased by 76.90% to $163.56 million when compared to the same quarter last year. Despite an increase in cash flow, REGENERON PHARMACEUTICALS's cash flow growth rate is still lower than the industry average growth rate of 117.89%.
  • REGENERON PHARMACEUTICALS's earnings per share declined by 44.0% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, REGENERON PHARMACEUTICALS reported lower earnings of $3.80 versus $6.61 in the prior year. This year, the market expects an improvement in earnings ($10.04 versus $3.80).

Isis Pharmaceuticals

Isis Pharmaceuticals (ISIS) is known best for its deep pipeline of antisense drugs and partnerships with companies including Biogen Idec (BIIB) , GlaxoSmithKline (GSK) , Sanofi (SNY) and Roche (RHHBY) .

Market Cap: $6 billion

52-week high: $62.66 on Feb. 24

52-week low: $22.25 on May 9

Year-to-date Return: 28%

TheStreet Ratings team rates ISIS PHARMACEUTICALS INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ISIS PHARMACEUTICALS INC (ISIS) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, weak operating cash flow and feeble growth in its earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and greatly underperformed compared to the Biotechnology industry average. The net income has decreased by 8.6% when compared to the same quarter one year ago, dropping from -$24.57 million to -$26.68 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Biotechnology industry and the overall market, ISIS PHARMACEUTICALS INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly decreased to $1.94 million or 97.04% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • ISIS PHARMACEUTICALS INC's earnings per share declined by 9.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, ISIS PHARMACEUTICALS INC continued to lose money by earning -$0.53 versus -$0.65 in the prior year. For the next year, the market is expecting a contraction of 18.9% in earnings (-$0.63 versus -$0.53).
  • Despite currently having a low debt-to-equity ratio of 0.47, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 6.21 is very high and demonstrates very strong liquidity.

BioMarin Pharmaceutical

BioMarin Pharmaceutical (BMRN) markets several drugs approved to treat rare, genetic diseases. Last week, the San Rafael, Calif.-based company agreed to buy Prosensa Holding (RNA) for $840 million. The deal will expand BioMarin's reach into rare-disease therapies.

Market Cap: $13 billion

52-week high: $91.40 on Nov. 25

52-week low: $55.04 on April 15

Year-to-date Return: 28%

TheStreet Ratings team rates BIOMARIN PHARMACEUTICAL INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate BIOMARIN PHARMACEUTICAL INC (BMRN) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, robust revenue growth and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we find that the company's return on equity has been disappointing."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Biotechnology industry. The net income increased by 114.0% when compared to the same quarter one year prior, rising from -$53.02 million to $7.45 million.
  • BMRN's revenue growth trails the industry average of 40.4%. Since the same quarter one year prior, revenues rose by 29.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Net operating cash flow has increased to -$8.36 million or 11.96% when compared to the same quarter last year. Despite an increase in cash flow of 11.96%, BIOMARIN PHARMACEUTICAL INC is still growing at a significantly lower rate than the industry average of 117.89%.
  • BIOMARIN PHARMACEUTICAL INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, BIOMARIN PHARMACEUTICAL INC reported poor results of -$1.29 versus -$0.95 in the prior year. This year, the market expects an improvement in earnings (-$1.08 versus -$1.29).
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Biotechnology industry and the overall market, BIOMARIN PHARMACEUTICAL INC's return on equity significantly trails that of both the industry average and the S&P 500.


Agios Pharmaceuticals

Agios Pharmaceuticals (AGIO) is a relatively new, developmental-stage company with two cancer metabolism drugs in mid-stage clinical trials.

Market Cap: $3.3 billion

52-week high: $111.60 on Nov. 28

52-week low: $16.84 on Dec. 2, 2013

Year-to-date Return: 302%

TheStreet Ratings team rates AGIOS PHARMACEUTICALS as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate AGIOS PHARMACEUTICALS (AGIO) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its weak operating cash flow and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has significantly decreased to -$23.47 million or 56.65% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • The gross profit margin for AGIOS PHARMACEUTICALS is currently extremely low, coming in at 10.48%. Despite the low profit margin, it has increased significantly from the same period last year. Despite the mixed results of the gross profit margin, AGIO's net profit margin of 10.92% is significantly lower than the industry average.
  • AGIOS PHARMACEUTICALS reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. For the next year, the market is expecting a contraction of 36.3% in earnings (-$1.45 versus -$1.06).
  • Compared to other companies in the Biotechnology industry and the overall market, AGIOS PHARMACEUTICALS's return on equity significantly trails that of both the industry average and the S&P 500.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Biotechnology industry. The net income increased by 133.1% when compared to the same quarter one year prior, rising from -$11.18 million to $3.70 million.

-- Written by Laurie Kulikowski in New York.

Follow @LKulikowski

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