By John Hodge
In case you haven’t noticed, pharmacy stocks are on the rise. Over the last three months we’ve seen Walgreen Company (NYSE:WAG) rise 27%, CVS Caremark Corporation (NYSE:CVS) up 12%, and Rite Aid Corporation (NYSE:RAD) higher by 50%. The reason is because of a generic shift where margins and operating cash flow is increasing. Despite this increase all still operate with incredibly tight margins, as the cash flow returns for diversified pharmacies remain a challenge. However, this in part is due to their diversification, and their decision to sell a wide array of pharmaceutical products.
With pharmacies seeing a great level of interest due to improved efficiency this might be the time to invest. However, the best investment might be the one that you’ve never heard of, one that might be presenting a new and innovating way of operating a pharmaceutical chain. Investors needs to gauge their own risk tolerance and decide which company presents the greatest upside for their own portfolio needs. Several companies deserve to be watched and they range from nano to large market capitalizations. Here are a few that I believe could be long term winners.
CVS Caremark Corporation (NYSE:CVS) is the largest in the drugstore space with a market cap of just under $70 billion, but the company has come under some scrutiny with the recent announcement that employees are being asked to reveal their weight, height, and body fat percentages, in an effort to control healthcare costs and encourage workers to be more proactive with their health and wellness. This policy will more than likely draw the ire of some employees, but in theory, the long term cost savings associated with having a healthy workforce should produce substantial cost savings for the company.
Walgreen Company (NYSE:WAG) shareholders enjoy the largest dividend yield of the drugstore chains at 2.6% despite earnings that are approximately $0.80/share less than its rival CVS. Both companies offer a modest dividend paid back to investors, but with both companies trading near 52 week highs and near their respective 1 year analyst consensus price targets; potential investors must weigh the recent price appreciation with tempered expectations, as to how much higher each stock can go in the near term.
Both of these companies offer relatively low risk investment opportunities; for the value investor looking more for a dividend yield in a diversified portfolio. I would consider both for someone interested in adding a position in the space, and not looking for large stock price growth in the near term.
Liberator Medical Holdings Inc. (OTC:LBMH)
For the investor looking to add a combination of modest share price growth potential and combine it with a low P/E ratio, I suggest Liberator Medical Holdings Inc. (OTC:LBMH). Here is a company that has quarterly earnings growth YoY of 197% , which leads the sector. Although not necessarily a brick and mortar drugstore, the company distributes medical supplies directly to the consumer. Liberator Medical (LBMH) provides additional services related to home health care and directly bills Medicare or the patients insurance company for them.
The company business model is very simplistic, which aids in keeping overhead expenses down, as they primarily market directly to consumers through targeted campaigns and media. The company has a robust product line up and services primarily elder consumers that may have difficulty in securing their medical supply needs through conventional means. Since they have been in business for over 100 years they have been able to build upon their client base and market assuredly with trust. Liberator Medical (LBMH) has a market cap of $48 million and is currently trading around $1.00 per share.
With its earnings growth at 197% year over year and a P/E ratio of 14.29 compared to CVS at 18.25 or Walgreen at 20.67, Liberator Medical appears undervalued at this time, and could offer an investor the opportunity to see nice share price appreciation both near and long term. I believe that LBMH is a good choice for the investor that seeks a bit more risk looking for share price growth with limited downside.
Assured Pharmacy (PINK:APHY)
Assured Pharmacy Inc. (PINK:APHY) is an incredibly undervalued stock, having a market cap of just $3.50 million. Unlike 99% of stocks with a market cap of $3.50 million, Assured is an actual business that creates revenue. This $3.50 million company has sales of $18.32 million over the last year, and this compares favorably to the $16.44 million that is posted the year prior. This means that while other pharmaceutical companies are losing annual revenue because of the patent cliff, Assured is gaining sales, but also looks to benefit from the patent cliff in terms of margins and efficiency.
In addition to gaining while others are losing revenue, Assured has also returned gains of 60% over the last three months, which is better than its peers. The reason is because Assured Pharmacy (APHY) focuses on pain management and works exclusively with the physician and their office to speed up the process of delivering prescriptions to the patient. Furthermore, pain management is the biggest market in healthcare, with the prescription hydrocodone being the most prescribed drug and both Oxycontin and Suboxone being two drugs that clear more than $1 billion in annual revenue.
Assured Pharmacy’s Upside (PINK:APHY)
Currently, it’s estimated that chronic pain affects almost four times as many people as those who suffer from diabetes in the U.S., at 100 million per year. With Assured Pharmacy’s (APHY) market being 100 million people per year, it’s safe to say that the company has a large market to monetize. However, the real upside for the company lies in the way that the company approaches both patients and physicians, with care and assistance in a timely manner.
In the last five years regulations on opioid control has increased drastically due to the epidemic of abuse. It is estimated that 12 million people in the U.S. abuse pain medication, which is most likely figured into the 100 million per year who report chronic pain. However, the bulk of these people are not misusing their medications, yet recent studies show that physicians estimate 30% of patients are drug seeking in some way and that pharmacies filling the pain medication also share the same 30% notion. Unfortunately, this is not fair to those in chronic pain, those who need quick relief, and with Assured focusing on this specific industry it aims to educate and work closely with physicians while providing the best care to consumers. Assured Pharmacy (APHY) may be the choice for the investor looking to find that “sleeper” company that has room for share price growth and could return large gains over time. Risk must be assessed before an investment in the nano cap space, as volatility and price swings can be more drastic than the larger more established players in the space.
Overall, I believe that this space offers several investment options, depending on the needs of the individual investor. Whether or not you are looking for long term value and steady dividends, or if you are seeking an aggressive growth company, there is something for everyone.