3 Unloved Stocks To Keep an Eye On

Some of the best investment opportunities emerge in the aftermath of a bubble. This is because the emotional devastation in the aftermath of a bubble's collapse leads investors to abandon an entire sector, creating a disconnect between price and value. 

Think of the dot-com bubble in the late 1990s. While most internet companies went bust, a few like Amazon and eBay survived the crash and went on to become giants. Additionally, a new crop of tech companies emerged that were able to effectively extract cash flow from their products in contrast to the first generation of companies. 

Similarly, after the 2008 housing bubble burst, homebuilder stocks and related real estate investments were left for dead. Yet, many homebuilders and other companies in the housing ecosystem recovered and went on to make new highs.

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Not all Bubbles Are the The Same

Not all bubbles are created equal; some industries recover and go on to make new highs, while others are permanently damaged. Some bubbles are followed by a rebound to new highs like housing and tech, while others never recover like cannabis stocks which peaked in 2018, or telecom stocks which were among the biggest winners in 2000.

Therefore, investors need to have an open mind in terms of potential outcomes and pay attention to fundamentals. To help investors avoid the permanent damage of a failed bubble and pinpoint the companies with enduring value, you need to look beyond the headlines. 

This is precisely what the Zen Ratings system is designed for. It’s an indispensable tool that analyzes a stock's fundamentals across multiple categories, helping you identify the companies that are quietly demonstrating the genuine operational and financial improvements required to power the next great rally.

Biotech: A Burst Bubble 

This brings us to the biotech stocks. The sector peaked in 2015 amid excitement about potential breakthrough treatments, related to gene-editing and immuno-oncology, that catapulted the entire sector higher. Some other elements supporting the advance were zero-percent interest rates, a red-hot IPO market for biotechs, and a surge in M&A activity as pharmaceutical companies, flush with cash, were looking to bolster their pipelines and drug discovery capabilities. 

However, the bubble burst in 2015 as there was renewed focus from politicians on drug pricing in addition to interest rates starting to move off the zero bound. All in all, the sector climbed more than 400% between 2009 and its high in July 2015. Since then, the sector has basically been range-bound and is up only 4% from these lofty levels, while the S&P 500 has more than tripled. 

Despite this underperformance, the fundamentals have continued to improve by all major metrics including cash flow, sales, and margins. Long-term, demand will continue to rise due to aging populations all over the developed world. Therefore, it's fair to conclude that biotech stocks have more in common with tech or housing than the bubbles that never went on to make new highs.

3 Promising Biotechs

The market's long-standing pessimism about the biotech sector has created a generational opportunity for patient investors. Due to its underperformance, valuations are quite attractive, even though the companies are in a much stronger position from a financial and operational perspective.

To capitalize on this opportunity, we've used the Zen Ratings to identify 3 biotech stocks with major upside. At some point, investor interest will return to the sector, and the bull market will resume. Below, we’ll take a closer look at our top picks…

1. Halozyme Therapeutics (Nasdaq: HALO)

Halozyme Therapeutics is a biotech company with a unique niche. Its core product is its proprietary drug delivery technology which uses special enzymes under the skin to administer large quantities of drugs to oncology patients. It’s a replacement for painful and inconvenient intravenous infusions. 

Halozyme licenses its technology to other pharmaceutical companies and generates royalty revenue. Due to this, HALO has a predictable and growing revenue stream which makes it a rarity among its peers. 

In its last earnings report, the company showed a 41% increase in revenue and 69% jump in earnings. Due to these better than expected results, analysts have been hiking EPS estimates. As of now, analysts are forecasting more than 50% growth in EPS over the next 2 years. 

Despite this bullish outlook, the stock is quite cheap with a forward P/E of 9.2. Given this impressive combination of growth and value, it’s not surprising to see that HALO is rated a Strong Buy (A) by the Zen Ratings. A-rated stocks are in an elite category with average annual performance of 32.5% which is significantly better than the S&P 500’s average annual 10.5% gain.  

HALO also stands out in terms of Component Grades with an A for Value and Financials. In fact, HALO ranks in the top 2% of all stocks in the Financials category. This is consistent with the company’s low debt, strong balance sheet, and high margins due to its royalty business model. 

2. Gilead Sciences (Nasdaq: GILD)

Gilead Sciences is a top biotech company which develops treatments for life-threatening diseases such as HIV, hepatitis, and cancer. Some of its blockbuster drugs include Biktarvy for HIV, Yeztugo for HIV protection, and Trodelvy for oncology. 

In its Q2 earnings, Gilead exceeded analysts’ estimates and hiked its full-year guidance on the top and bottom-line, affirming its growth trajectory. Over the next 3 years, the company is forecast to grow EPS 22% annually. It also has promising treatments in the pipeline for cancer treatment and HIV PrEP. 

Despite its robust growth outlook, Gilead trades at a forward P/E of 13.2 while paying a 2.7% dividend. It’s quite impressive that GILD is substantially cheaper than the S&P 500 while also having faster earnings growth and a higher dividend yield. These conditions highlight the tantalizing opportunity that biotech stocks offer for investors.

In terms of the Zen Ratings, GILD is rated a Buy (B). B-rated stocks have delivered average annual performance of 19.9% which easily beats the S&P 500’s average annual gain of 10.8%. Wall Street analysts are also bullish on the stock. Out of 12 analysts covering the stock, 6 rate it a Strong Buy, 4 give it a Buy rating, and 2 have it as a Hold. Notably, Gilead has no Sell or Strong Sell ratings.

It also ranks in the top 2% of stocks for Safety, indicating its low volatility and consistent performance, which means Gilead can also appeal to risk-averse investors. The company is also financially sound with a very low debt-to-equity ratio of 1.3, 78.3% gross margins, and $7.1 billion in cash.  

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3. Veeva Systems (NYSE: VEEV)

Some investors are understandably apprehensive about investing in individual biotech stocks given the inherent risks involved with drug development, even if they are bullish on the theme. Thus, they may favor a stock like Veeva Systems which is a cloud-based software platform for the pharmaceutical and biotech industry that helps companies manage clinical trials, regulatory compliance, and customer relationships. 

VEEV is attractive to many investors, because it offers the scalability, high margins, and asset-light structure of a software company while selling into an industry with consistent growth, pricing power, and larger barriers to entry. 

As a result, VEEV is on an impressive streak of beating earnings expectations for 20 straight quarters. This year, analysts have hiked 2026 and 2027 earnings estimates given better than expected margin expansion on lower costs and higher pricing. Equally important, VEEV has become integrated into the workflows and operations of the largest biotech and pharmaceutical companies in the world. As of Q2, the company counts 47 of the 50 top biotech and pharmaceutical companies among its customers. 

VEEV’s strength is also reflected in the Zen Ratings. The company has an overall Buy (B) rating. It also ranks in the top 2% of stocks in terms of Financials. This is due to its low levels of debt, increasing operational leverage, and rising return on equity. 

Conclusion

The biotech sector, after a decade of underperformance, is now demonstrating a quiet yet powerful disconnect between price and value. These opportunities are rare but tend to arise in the aftermath of bubbles, when investors become disinterested in the sector.

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