What a difference 72 hours can make. Just a few days ago I was looking to find consumer/cyclical/”re-opening dependent” shares as the stock market looked to be rotating away from recent technology and momentum leaders and toward beaten down shares that would climb with a new coronavirus rescue package and a stabilization of the re-opening economy.
But yesterday, August 12, that rotation stalled. Some of what loss of momentum was a result of profit-taking after a few days of rally in those sectors.
But more, was a reflection of news today that Congressional talks focused on negotiating a deal that would result in new funding–$1 trillion in the Republican proposal or $3.4 trillion in the Democratic proposal–had collapsed and were unlikely to resume until after the end of Senate’s recess on September 7.
I don’t think the stock market as a whole is inclined to pull back very much from its new all-time highs.
But I do think it will revert in its buying to those stocks that drove the market higher even as prospects for the general economy looked grim.
I’ve been watching West Pharmaceutical Series (WST), a January pick in my long-term 50 Stocks Portfolio, climb this year on revenue that seems immune from the effects of the coronavirus pandemic. The stock is up 81.55% year to date for 2020 as of the close on August 12 and the position is up 72.86% in my 50 Stocks Portfolio since my January 21. 2020 pick
And I’ve watched as the stock joined in today to the rotation back to momentum leaders from the rally. Shares gained 2.98% today.
Back on January 21 I wrote: “West Pharmaceutical Services (WST) specializes in selling small stuff–lots of it in lots of different configurations–for the pharmaceutical, biotechnology, and generic drug industries. West Pharmaceutical develops, manufactures, and distributes elastomer-based supplies for the containment and administration of injectable drugs, including basic equipment such as syringes, stoppers, and plungers, along with somewhat more complicated devices including auto-injectors and other self-injection platforms. Proprietary products made up 76% of sales in 2018 with contract-manufactured products making up the other 24%. About 44% of revenue comes from the United States with the other 56% coming from international markets. Now it might seem unlikely that a company could wrest a five-year or longer competitive advantage from making syringes, plungers, vials, and rubber components. But West Pharmaceutical’s customers operate in the highly regulated drug industry where changing the manufacturer of a relatively low cost injectable system component requires regulatory approval. (Any component that comes in direct contact with the drug agent must be written into each new drug application sent to the U.S. Food & Drug Administration and remains on file for the life of the product.) Which creates huge switching costs for West Pharmaceutical’s customers over a component that on average sells for 4 cents. With this stock you’re getting exposure to growth in both the drug industry as a whole and to the faster growth in the injectables segment.”
What’s happened since then is that on July 24Â West Pharmaceutical Services reported year over year sales growth of 12.2% for the second quarter and record gross margins of 37%. The results came in spite of the coronavirus pandemic and the company actually saw a relatively paltry $19 million in the quarter from covid-19 connected revenue. For the full year it’s likely that West will see about $60 million in coronavirus-related revenue (out of a forecast $2.05 billion in 2020 sales.) Most of the growth for the company will come from double-digit sales growth and a continued increase in gross and operating margins.
But that doesn’t stop investors and traders from including West Pharmaceutical Services among a very small group of companies that aren’t seeing negative effects on their business from the global pandemic and from seeing the possibility of reaping higher sales and profits from the pandemic and an eventual vaccine.
Like almost every momentum winner in this market West Pharmaceutical Services is over-valued on the fundamentals now–although I like the long term fundamentals very much. (What’s not to like about  company with a 70% share of the market for injectable drug primary packaging.) I see this as a momentum play that,  on the market rotation back to momentum/technology winners, could result in  an additional 20% gain to the shares.
I’m adding West Pharmaceutical Services to my Jubak Picks Portfolio with a target price of $326 a share. Â The stock closed at $272.44 on August 12.
Full disclosure: I own shares of West Pharmaceutical Services in my personal portfolios.
