Among companies trading on the New York Stock Exchange and the Nasdaq, health care companies trade significantly below their median price-sales (P/S) valuation. At least five companies made the “Undervalued Biotech” screener, including Biogen Inc. (BIIB, Financial), Gilead Sciences Inc. (GILD, Financial), JAZZ Pharmaceuticals PLC (JAZZ, Financial), Novo Nordisk A/S (NVO, Financial) and United Therapeutics Corp. (UTHR, Financial). As these companies present strong value potential to investors and shareholders, several gurus have invested in these companies.
This article is Part 3 in a series of articles discussing how to visualize financial trends with interactive charts. In Part 1, we introduced interactive charts and explored preliminary features within the interface. We then explored a few predefined interactive charts in Part 2, including the income statement chart and the balance sheet chart.
P/S valuation chart highlights buy and sell signals
As the name suggests, the predefined “P/S valuation bands” interactive chart graphs the company’s stock price, the “Price at Min P/S” line and the “Price at Max P/S” line. This chart allows GuruFocus users to visualize when the stock is significantly undervalued or overvalued based on the P/S ratio.
For cyclical companies like Walmart Stores Inc. (WMT, Financial), the price-earnings (P/E) ratio can give inaccurate valuations as discussed in a previous article on key valuation ratios. As Peter Lynch observed throughout his career, cyclical companies have volatile earnings: the profit margins skyrocket near the peaks of business cycles and tumble during recessions. The seasonably high earnings can underestimate the company’s P/E. As it likely gives more accurate valuations, Fisher Asset Management CEO Ken Fisher (Trades, Portfolio) invests in companies with an investing approach based on P/S ratios. Additionally, Warren Buffett (Trades, Portfolio) measures the total market valuation with the “P/S ratio for the market.”
Figure 1 shows Walmart’s P/S valuation bands chart. Based on this chart, we can easily visualize when Walmart offers good value potential: when the price line (shown in green) drops near the “price at min P/S” line (shown in light blue). This occurred during late 2011 and late 2015 according to Figure 1.
Figure 1
Biotech stocks mostly undervalued based on statistical observations
To determine the industries with high numbers of undervalued companies, we first computed the valuations based on the historical minimum P/S, the median P/S and the maximum P/S over the past 10 years. We then compared the stock price (as of Nov. 23) to the valuations and calculated the percent deviation from the median P/S valuation. Figures 2 and 3 summarize the distribution of the P/S valuations and the distribution of the percent deviations from the MPSV.
Figure 2
Figure 3
Across industries, the average minimum P/S valuation, average median P/S valuation and average maximum P/S valuation are near $20 per share, $35 per share and $90 per share. The distribution of percent deviations are slightly left skewed, with the majority of companies trading within 40% higher than their historical median P/S valuation. This suggests that most NYSE and Nasdaq companies are overvalued as of Nov. 23.
For each company, the statistical study assigns a relative valuation and an investment grade based on the relative valuation. These grades range from 3 for significantly undervalued companies to -3 for significantly overvalued companies, as summarized in Table 1.
| Percent deviation from MPSV | Valuation | Investing Grade |
| -99 | Significantly undervalued | 3 |
| -50 | Moderately undervalued | 2 |
| -20 | Undervalued | 1 |
| -5 | Fair valued | 0 |
| 10 | Overvalued | -1 |
| 20 | Moderately overvalued | -2 |
| 50 | Significantly overvalued | -3 |
Table 1
We then take the sum of all investing grades for a particular industry to determine the industry’s overall investing score. Higher investing scores suggest stronger value potential within the industry. On the other hand, industries with negative investing scores offer good sell signals. As of Nov. 23, the biotechnology industry has the highest investing score and thus the strongest value potential, among industries. Table 2 further shows that the health care sector has the highest value potential among the sectors.
| Sector | Sector code | Investing score |
| Basic Materials | 101 | -103 |
| Consumer Cyclical | 102 | 4 |
| Financial Services | 103 | -796 |
| Real Estate | 104 | -125 |
| Consumer Defensive | 205 | -135 |
| Health Care | 206 | 43 |
| Utilities | 207 | -180 |
| Communication Services | 308 | -32 |
| Energy | 309 | -142 |
| Industrials | 310 | -239 |
| Technology | 311 | -96 |
Table 2
We can identify the companies with the strongest value potential using the All-in-One Guru Screener, a powerful screener with over 150 predefined filters. You can also customize your filters using the “Customized” tab. While you can create a customized filter that only lists companies trading below their median P/S valuation (see Figure 4.1), you can simply activate the filter “Price/Median PS blank to 1” as shown in Figure 4.2.
Figure 4.1
Figure 4.2
The “Undervalued Biotech” screener contains the following filters:
- The company is in the biotechnology industry.
- The market cap is at least $2 billion.
- The company’s predictability rank is at least one-star.
- The company’s P/S ratio is less than the 40th percentile of the industry P/S.
- The company’s price to median P/S is less than 1.
- Over-the-counter stocks are excluded.
As of Nov. 23, the screener lists five biotech companies. The two five-star companies, Biogen and Novo Nordisk A/S, have the highest price to median PS among the companies while Gilead Sciences has the lowest price to median PS and the lowest P/S.
Several gurus invested in the biotechnology industry during the third quarter, likely due to high value potential. Jeff Auxier (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) both increased their positions in Biogen, a robust biopharmaceutical company based in Massachusetts. As discussed in a previous article, Auxier increased his stake in Biogen and Irish-based Allergan PLC (AGN, Financial) as both companies reported strong third-quarter earnings.
Rival Irish biotech company Jazz Pharmaceuticals had seven guru buys and just two guru sells within the past three months, according to consensus picks data. The company reported “solid top-line growth” in the commercial business, which contributed to a 10% increase in total revenues. Diluted earnings per share based on generally accepted accounting principles increased 2 cents from third quarter 2015. Jim Simons (Trades, Portfolio), who owns the largest stake in Jazz, increased his position 27.14% during the quarter. Even though Steven Cohen (Trades, Portfolio) owns just 352,200 shares, the fourth-largest stake among Jazz owners, the Point 72 asset manager expanded his Jazz stake 60.90%. Andreas Halvorsen (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) also increased their Jazz position.
Up next
In the final part of this article series, we will explore three user-defined charts that illustrate several advanced features within Interactive Charts: creating customized series, saving user-defined charts and incorporating technical indicators. You can view the user manual on interactive charts by clicking the “PDF Tutorial” button in the upper-right corner, between the “Reset All” and “Video” buttons. Although free members have limited access to Interactive Charts, most of the features require premium membership. If you are not a premium member, we invite you to sign up for a free seven-day trial.
Disclosure: The author has no position in the stocks mentioned in this article.
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