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5 Graham's Lost Formula Biotech Stocks to Consider for May

These companies may offer good value

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May 03, 2022
Summary
  • Biotech companies that met the criteria included Regeneron Pharmaceuticals, Moderna, Seagen, TG Therapeutics and NGM Biopharmaceuticals.
  • The renowned investor developed the formula shortly before his death.
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After a brutal month in April, U.S. market indexes were lower on Tuesday as investors await the Federal Open Market Committee’s decision on interest rates.

On Tuesday morning, the Dow Jones Industrial Average declined 0.18%, the S&P 500 Index decreased 0.01% and the Nasdaq Composite fell 0.49%.

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In regard to individual sectors, health care stocks were up, having gained 0.66%. Year to date, however, the sector is down 33.18% as the economy continues to reopen following the Covid-19 pandemic.

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As a result of these developments, investors may be interested in health care companies that qualify for Benjamin Graham’s Lost Formula screen, a Premium GuruFocus feature.

Prior to his death in 1976, the author of "Security Analysis" and "The Intelligent Investor" developed a refined formula that screened for companies with a price-earnings ratio of less than 10 and an equity-to-asset ratio of at least 0.5. The formula got its name from that fact that he was unable to publish it before his passing; therefore, it was lost from public knowledge for a time. Since Graham also prioritized a minimum interest coverage of 5 with the companies he invested in, that element was included in the criteria as well.

A backtest of the strategy from 1926 to 1976 showed it would have outperformed the Dow benchmark by approximately twice as much.

The screener found that as of May 3, biotech companies that met these criteria included Regeneron Pharmaceuticals Inc. (

REGN, Financial), Moderna Inc. (MRNA, Financial), Seagen Inc. (SGEN, Financial) and newcomers TG Therapeutics Inc. (TGTX, Financial) and NGM Biopharmaceuticals Inc. (NGM, Financial).

Regeneron Pharmaceuticals

Regeneron Pharmaceuticals (

REGN, Financial) has a $72.36 billion market cap; its shares were trading around $659.45 on Tuesday with a price-earnings ratio of 9.15, a price-book ratio of 3.82, a price-sales ratio of 4.60 and an equity-to-asset ratio of 0.74.

The New York-based biotech company develops treatments for eye disease, cardiovascular disease, cancer and inflammation.

The GF Value Line suggests the stock is a possible value trap currently based on historical ratios, past financial performance and future earnings projections. As such, potential investors should conduct thorough research before making a decision.

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GuruFocus rated Regeneron’s financial strength 8 out of 10 on the back of a comfortable level of interest coverage and a robust Altman Z-Score of 9.82 that indicates it is in good standing even though the Sloan ratio is indicative of poor earnings quality. The return on invested capital also overshadows the weighted average cost of capital, meaning value is being created as the company grows.

The company’s profitability scored a 9 out of 10 rating, driven by an expanding operating margin and strong returns on equity, assets and capital that top a majority of competitors. Regeneron also has a moderate Piotroski F-Score of 5 out of 9, meaning business conditions are typical for a stable company, and a predictability rank of one out of five stars. According to GuruFocus research, companies with this rank return an average of 1.1% annually over a 10-year period.

Of the gurus invested in Regeneron, the

Vanguard Health Care Fund (Trades, Portfolio) has the largest stake with 1.71% of its outstanding shares. Bill Nygren (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Dodge & Cox, Tom Gayner (Trades, Portfolio), Catherine Wood (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and several other gurus also have positions in the stock.

Moderna

Moderna (

MRNA, Financial) has a market cap of $58.59 billion; its shares were trading around $146.04 on Tuesday with a price-earnings ratio of 4.97, a price-book ratio of 4.01, a price-sales ratio of 3.29 and an equity-to-asset ratio of 0.57.

The company, which is headquartered in Cambridge, Massachusetts, focuses on developing RNA therapeutics, primarily mRNA vaccines like the one to treat the Covid-19 virus.

According to the GF Value Line, the stock is a possible value trap currently. As such, potential investors should tread lightly before making a decision.

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Moderna’s financial strength was rated 8 out of 10 by GuruFocus. Despite having a Sloan ratio that is indicative of poor earnings quality, it is supported by adequate interest coverage and a high Altman Z-Score of 6.7. The ROIC also eclipses the WACC, so value creation is occurring.

The company’s profitability did not fare as well, scoring a 4 out of 10 rating despite having margins and returns that outperform over half of its industry peers. Moderna also has a high Piotroski F-Score of 7, meaning operations are healthy.

With an 11.36% stake,

Baillie Gifford (Trades, Portfolio) is Moderna’s largest guru shareholder. Other top guru investors include Philippe Laffont (Trades, Portfolio), Simons’ firm, the Parnassus Endeavor Fund (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Greenblatt.

Seagen

Seagen (

SGEN, Financial) has a $24.27 billion market cap; its shares were trading around $131.85 on Tuesday with a price-book ratio of 8.09, a price-sales ratio of 14.44 and an equity-to-asset ratio of 0.83.

The Bothell, Washington-based biotech company develops monoclonal antibody-based therapies to treat cancer.

Based on the GF Value Line, the stock appears to be modestly undervalued currently.

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GuruFocus rated Seagen’s financial strength 8 out of 10, driven by a comfortable level of interest coverage and a robust Altman Z-Score of 23.23. Assets are also building up at a faster rate than revenue is growing, suggesting the company may be becoming inefficient.

The company’s profitability scored a 3 out of 10 rating on the back of negative margins and returns. Seagen is also weighed down by a low Piotroski F-Score of 2, meaning operations are in poor shape, and a one-star predictability rank that is on watch due to declines in revenue per share.

PRIMECAP Management (Trades, Portfolio) is Seagen’s largest guru shareholder with a 2.53% stake. It is also held by Vanguard, Steven Cohen (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Jerome Dodson (Trades, Portfolio), Simons’ firm, Paul Tudor Jones (Trades, Portfolio), Greenblatt and Baillie Gifford (Trades, Portfolio).

TG Therapeutics

Having recently qualified for the screener, TG Therapeutics (

TGTX, Financial) has a market cap of $1.03 billion; its shares were trading around $7.15 on Tuesday with a price-book ratio of 4.32, a price-sales ratio of 140.25 and an equity-to-asset ratio of 0.63.

Headquartered in New York, the biotech company develops novel treatments for B-cell malignancies and autoimmune diseases.

The price chart shows the stock has tumbled nearly 65% year to date.

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TG Therapeutics’ financial strength was rated 4 out of 10 by GuruFocus. Its weak Altman Z-Score of -2.43 warns the company could be at risk of bankruptcy if it does not improve its liquidity.

The company’s profitability also did not fare well with a 3 out of 10 rating. Although the operating margin is expanding, its returns are negative and underperforming versus competitors. TG Therapeutics also has a low Piotroski F-Score of 3 and a one-star predictability rank.

Of the gurus invested in TG Therapeutics,

Lee Ainslie (Trades, Portfolio) has the largest stake with 4.23% of outstanding shares. It is also held by Vanguard, Ken Fisher (Trades, Portfolio) and Simons’ firm.

NGM Biopharmaceuticals

Another recent addition to the screener, NGM Biopharmaceuticals (

NGM, Financial) has a $1.02 billion market cap; its shares were trading around $13.08 on Tuesday with a price-book ratio of 3.08, a price-sales ratio of 13.08 and an equity-to-asset ratio of 0.83.

The South San Francisco-based clinical-stage pharmaceutical company develops novel therapeutics based on the understanding of key biological pathways to treat cardio-metabolic, liver, oncologic and ophthalmic diseases.

According to the GF Value Line, the stock is fairly valued currently.

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GuruFocus rated NGM Biopharmaceuticals’ financial strength 8 out of 10. In addition to a comfortable level of interest coverage, the Altman Z-Score of 7.97 indicates the company is in good standing.

The company’s profitability scored a 2 out of 10 rating, weighed down by negative margins even though returns outperform over half of its industry peers and a low Piotroski F-Score of 2. In recent years, NGM has also recorded a decline in revenue per share.

With a 4.22% stake, Cohen is NGM’s largest guru shareholder. Simons’ firm also owns the stock.

Additional options

Other biotech companies that also qualified for the screener included Ginkgo Bioworks Holdings Inc. (

DNA, Financial), Ultragenyx Pharmaceutical Inc. (RARE, Financial), Cerevel Therapeutics Holdings Inc. (CERE, Financial), Arrowhead Pharmaceuticals Inc. (ARWR, Financial) and Intellia Therapeutics Inc. (NTLA, Financial).

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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