If you have even a hint of a contrarian personality, you should look no further than the pharmaceutical industry. Thanks to various scandals and controversies like the one impacting Valeant Pharmaceuticals Intl Inc (NYSE:VRX), plenty of big players are trading at a discount compared to historical market value.
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If I had to go contrarian, I want to go with whoever gives me the best chance at success. Under this condition, I believe Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is a compelling opportunity.
TEVA stock is a classic case of a good investment struggling with poor, and in this case, confounding decisions. The woes surrounding Teva Pharmaceuticals have been broadcast ad-nauseam. But in case you’ve just woken up from a coma, internal chaos resulted in the ousting of Teva’s CEO and the departure of its CFO. The pharma company also has to control mounting liabilities, and an angry public who view the industry extremely unfavorably.
The markets have also done little to offer hope for TEVA stock investors. In the last five years, shares have lost nearly 21% in the markets. In the trailing year, TEVA has shed 39%. While bullish analysts can talk about various forecasts and developments, we must admit that the story hasn’t panned out well.
Nevertheless, I think the problems impacting Teva Pharmaceuticals — as big as they are — are very much solvable. Any organization can run into political problems or a PR crisis. Furthermore, internal struggles are distracting but not terminal.
I’d much rather have a good company in troubled times than a troubled company in good times. With that said, let’s take a look at reasons to be encouraged by TEVA stock.
Technical Bounceback for TEVA Stock
At its lowest point this year, Teva Pharmaceuticals closed down at $27.53 on May 30. At that time, its year-to-date performance was -23.6%. Undoubtedly nervous, investors recalled that in 2016, TEVA was down 18.5% at the end of May. Shares then went on to post a harrowing 42% loss.
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Fortunately, history hasn’t repeated itself yet. For the month of June, Teva Pharmaceuticals gained an impressive 13%. Despite having a volatile July, shares are now down 14% YTD.
True, this isn’t necessarily a cause for celebration. But what it does is provide evidence that the bottom may be in for Teva.
As I argued in my previous write-up for the pharma company, I think investors need to think like short traders. Theoretically, a pure bearish position is the riskiest move in finance because upside potential of a stock is limitless.
Thus, you have to consider whether or not as a bear, if you would take the trade right now? Being bearish now just seems awfully obvious, considering that all the bad news has been baked in. And if you’re unsure about the short position as a theoretical situation, imagine the pressure of actual money involved!
Nothing “Generic” About Generic Drugs
InvestorPlace contributor Richard Saintvilus is bullish on TEVA stock for good reason. One of his strongest arguments is the Teva Pharmaceuticals acquisition of generic drugmaker Actavis. Thanks to the deal, Teva is legitimately the world’s largest generic drug maker. That’s a hefty title that no investor should take lightly.
But Saintvilus goes further, stating, “What’s more, even after having trimmed its headcount by about 5,000 people following the closing of the Actavis deal in August, Teva Pharmaceuticals still expects to cut about $1.5 billion in capital expenses this fiscal year. There’s still almost $2 billion worth of business synergies that Teva can realize with Actavis once the company cuts out redundant operations, which should boost long-term profit margins.”
In addition, the company can work out a PR angle with its generic business. Because of its status, TEVA has pricing leverage with health insurance firms. They can choose to be a part of the problem, but indications are that they’d like to be a part of the solution.
Talking about regulations in China, Teva Pharmaceuticals interim president and CEO Yitzhak Peterburg stated in a CNBC interview, “Now remember, we have the biggest cabinet of drugs in the world. We really are part of the good guys. We are the generic ones. We can bring quality into this market but if the time to register a drug takes two, three, four, five years, it’s too long.”
Teva Pharmaceuticals Earnings Momentum
For a company in turmoil, TEVA stock has an uncanny ability to perform when it counts. Since its last earnings miss for Q4 fiscal 2015, Teva Pharmaceuticals has strung together five consecutive beats. The performance is also very consistent, averaging a positive surprise of nearly 3%.
In its most recent Q1 earnings report, TEVA increased revenue to 17% over its year-ago quarter. As Saintvilus notes, generic drug sales — which itself gained 24% — boosted the top-line.
At this point, the only thing holding TEVA stock back is its internal politics and financial controls. The fundamental performance is well established, and under extremely challenging headwinds, I might add. Once it removes its own shackles, Teva Pharmaceuticals is back to being a serious contender.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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