This Generic-Drug-Stock Bloodbath Provides an Early Holiday Gift

Sometimes it seems that USA stands for "United States of Amnesia."

A scandal that ostensibly kills off a candidate or company is quickly forgotten when it is replaced by a new outrage, which is soon replaced by another, and so on.

The public's short attention span combined with the 24/7 news cycle makes it imperative to invest with a contrarian viewpoint. The latest example of the madness of crowds is Thursday's bloodbath in generic-drug-maker stocks.

The sell-off looks overdone, and the best buying opportunity is one of the hardest-hit stocks: Teva Pharmaceutical Industries (TEVA) , a major manufacturer and marketer of generic drugs.

TEVA Chart
TEVA data by YCharts

First, let's see what all the fuss is about.

News broke Thursday that the Department of Justice intends to launch criminal investigations by the end of the year against a slew of generic-drug makers for price fixing. Aside from Teva Pharmaceutical Industries and its Actavis Generics unit, the companies include Dr. Reddy's Laboratories, Endo International, Mylan and Taro Pharmaceuticals.

The Justice Department bombshell crushed the shares of generic-drug makers. Consider the one-day bloodbath: Dr. Reddy's Laboratories (-4.08%); Endo International (-19.48%); Mylan (-7.06%); Taro Pharmaceuticals (-7.29%); and Teva Pharmaceutical Industries (-9.53%). 

We have seen this scenario before.

The feds make a splashy announcement about corporate malfeasance, Wall Street overreacts, corporate executives are pilloried in the public stockades and then the headlines fade. Modest fines are paid, bruised egos heal and business goes on.

The cycle occurs with even greater regularity in the political world. One week, Republican presidential candidate Donald Trump's poll numbers tank because of a misogynistic statement caught on tape, and then the next week Democratic candidate Hillary Clinton takes a hit for her emails.

Remember the so-called 2013 London Whale scandal that initially depressed shares of JPMorgan Chase? 

The bank eventually agreed to pay $920 million in penalties because of what British and U.S. regulators called "unsafe and unsound practices" in its London office. JPMorgan Chase is thriving and it is one of the strongest bank stocks you can buy.

The same goes for Wells Fargo, which already is rebounding from this year's scandal over creating false customer accounts.

Wells Fargo is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells WFC? Learn more now.

Accordingly, it is hard to imagine that any civil or criminal penalties against the affected generic-drug makers could make a lasting dent in their massive prospects.

Perhaps the companies are indeed guilty of price collusion, and if that is the case, they certainly should be punished. But whatever happens, it is extremely unlikely that their ability to generate substantial revenue and profits over the long term will be permanently crippled.

Among the accused parties, Teva Pharmaceutical Industries stands out as most compelling investment opportunity. Based in Israel, Teva Pharmaceutical Industries is the largest generic-drug manufacturer in the world and one of the 15 largest pharmaceutical companies worldwide.

Teva Pharmaceutical Industries owns a global patent portfolio of more than 1,000 molecules. The company's biggest-selling products include Azilect for Parkinson's disease, Copaxone for the treatment of multiple sclerosis, and Nuvigil and Provigil for narcolepsy and other sleep disorders.

The company also develops patented biologic treatments, which are derived from animals, humans or microorganisms. Biologics can be composed of living cells and tissues, proteins or sugars.

Teva Pharmaceutical Industries also is pursuing the market for biosimilars, which are generic, less costly copies of biologics. Gene-based biologics are in the vanguard of cancer research, but as they lose patent protection the door is opening for biosimilars.

The company is readying several new biosimilar drugs for market that should pay off.

With a market capitalization of $35.83 billion and total cash on hand of $6.98 billion, Teva Pharmaceutical Industries boasts more than enough financial wherewithal to weather the storm.

The company's proven ability to produce new and successful drugs for a vast customer base prompts analysts to estimate earnings growth of 4.56% over the next five years, compared with 0.19% for the generic drug industry.

Teva Pharmaceutical Industries price-book ratio is 29.3, compared with the industry's 65.9, making the stock one of the most attractive value plays.

The stock is trading above $39 on Friday. The median analyst one-year price target is $65.50, which would represent a hefty gain of more than 67%.

The dividend yield is at 2.92%.

Think of the company's undervalued total return package as an early holiday gift.

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John Persinos is an investment analyst at Investing Daily.

At the time of publication, he owned stock in TEVA and WFC.

Persinos appears as a regular commentator on the financial television show Small Cap Nation. Follow him on Twitter.

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