It's looking increasingly likely that some kind of healthcare reform bill wlll be signed into law this year. The prospect of the healthcare industry becoming less profitable has many investors and institutions avoiding the sector thus creating some good opportunities. As a first cut, I asked Kai Petainen, a long-time m100 member, for a healthcare stock that looked attractive from more than one quantitative investment style. He selected Endo Pharmaceuticals (ENDP).

Endo Pharmaceuticals (ENDP)
By: Kai Petainen

My recommendation: LONG
Current Price: $18
My target price: $23

I like stocks that have a value, growth, momentum and a smart money story. Those stocks I can pitch to a variety of funds and perhaps a variety of funds might purchase the stock. I'm not the type to spin a cool story about their product, as there are plenty of blogs, analysts and others that have a tendency to pitch the product and not the stock. I specialize in another form of analysis... where I try to find stocks that might appeal to 'investor recognition', and as such will rise as more funds, analysts and investors find the stocks appealing.

Endo Pharmaceuticals has a value story that could appeal to a value fund. It has a trailing PE of 9, a price/book of 1.7. Using a discount of 8%, terminal sales growth of 5%, matching EPS estimates (but 0.05 higher) than that of other analysts, and a terminal ROE of 8%, I made a DCF valuation of ENDP and received a target price of $23. With a target price of $23, and some favorable value indicators, ENDP could appeal to some value funds.

ENDP could appeal to some growth funds. Analysts' estimates forecast 13% sales growth this year and 6% in the next year, but growth can be analyzed in other ways as well. Perhaps one of the largest catalysts for ENDP could occur as the company grows just a bit more, as it is teeters on the edge of small cap vs. midcap classification. If the stock were to cross over into midcap territory then it would be picked up by more funds as it could be applied to more index funds, and it could have enough market value to meet eligibility requirements in certain funds.

ENDP could appeal to some momentum funds. It has had some earnings momentum, as earnings increased from 0.49 to 0.67 in the past quarter (from the year before) and from 0.52 to 0.69 in the quarter before that. ENDP has also beat analyst expectations by 0.05 or more in the past 4 quarters (with 20+ analysts covering the stock?!). One cautionary note - as the company has beat by 0.05+ each time, one could assume that they should beat by 0.05 in the next earnings announcement. If they do not beat the earnings by at least 0.05, then expect at least a short drop in the stock.

ENDP could appeal to some 'smart money' funds as well, as insiders have picked up some shares in the past few months at $16. Although institutions have been selling the stock, some of those trades could be coming from small-cap funds that need to reduce their holding in ENDP as it crosses into midcap territory, and then midcap funds will pick up on it.

Lastly, I won't bother going into the specifics, but the quant-heads know who they are and what I mean, ENDP has a low F-score and a decent Piotroski score, and so ENDP could appeal to the quant funds as well.

I really haven't spoken much about the actual business of ENDP, but that is simply because I am not an expert in that manner. I'll note that Endo Pharmaceuticals is a small-cap, Pennsylvanian based company that specializes in generic and brand name pharmaceuticals for pain relief, bladders, early puberty, prostate cancer, and hypogonadism. They're also involved in research relating to HIV prevention, diabetic pain and treatment for acromegaly.

I like Endo Pharmaceuticals (ENDP) and I have a price target of $23. I believe it could appeal to a variety of investors, as value, growth, momentum and 'smart money' funds/investors may find the stock appealing.