Extreme Growth Stock on the Verge of a Big Rally

Today’s pick is what I like to call an “extreme growth stock.” It’s a pharmaceutical company seeing significant advances in sales and earnings with huge momentum. Shares are up nearly 150% in the past two years, and they look ready to move even higher in the weeks and months to come. 

First, it’s part of a very strong group that continues to outperform. The pharmaceutical sector was hot in 2014, with iShares US Pharmaceuticals (NYSE: IHE) gaining 28.2% last year, more than double the S&P 500’s 11.4% rise. And just this month, IHE is up another 3.8% while the S&P 500 is down 2.5% year to date.

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Second, the company has rock-solid fundamentals, largely due to its development and acquisition of numerous strong brands. 

Although you may not have heard of Valeant Pharmaceuticals (NYSE: VRX), it’s a massive pharma company with a market cap over $50 billion. It manufactures branded drugs for the treatment of dermatological, neurological and oral health issues. 

One of its most well-known drugs is Wellbutrin XL for the treatment of depression. Its over-the-counter brands include vision products ReNu MultiPlus contact lens solution and Ocuvite eye vitamins.

To grow revenues, VRX has been on an acquisitions binge. The company’s website lists more than 45 acquisitions and licensing-related agreements since 2008. Recently, it acquired big-name Bausch + Lomb and PreCision Dermatology.

CEO J. Michael Pearson also knows when to walk away from a deal. Recently, the company attempted to buy drug manufacturer Allergan (NYSE: AGN), the maker of Botox. When a bidding war ensued with competitor Actavis (NYSE: ACT), VRX excused itself from the table due to the high cost. Pearson stated that the firm will refocus its efforts on acquisitions of smaller, private companies in 2015. 

This leads us to VRX’s fundamentals. Both earnings per share (EPS) and revenue have shown consistent, double-digit advances.  

Earlier this month, management reported they expected 2015 revenue of $9.2 billion to $9.3 billion with adjusted earnings between $10.10 per share and $10.40 per share. This is above analysts’ consensus estimates for EPS of $10.05 per share on $9.03 billion in sales. 

Not only has Wall Street cheered the company’s growth with a higher stock price, but credit ratings service Moody’s (NYSE: MCO) upgraded VRX’s overall debt outlook from stable to positive. An upgrade like this could benefit the company in a big way since higher credit ratings can mean lower interest rate payments on debt the company can refinance. 

And VRX has accepted its fair share of debt during its spate of acquisitions. At the beginning of Q4 2014, it had $15.6 billion in long-term outstanding paper.

Technically, VRX has a propensity toward large trends. Shares rose from roughly $50 in mid-2012 to $150 in early 2014.

VRX Chart

The stock used the rest of last year to digest this monster gain. A new uptrend started early this month when VRX broke through $150 resistance and made a series of all-time highs. 

Volume on the Jan. 8 breakout was massive with 5.8 million shares changing hands, nearly three times the stock’s average daily volume. VRX surged 6.2% that day, indicating institutions weren’t afraid to pick up a sizeable amount of shares for a small premium. I believe this heavy institutional buying is a sign that VRX is in the beginning of yet another big trend. 

Big trends require large institutional buying. Large institutions need liquidity to take a meaningful position size without pushing the price too high. VRX has a $54 billion market cap and a triple-digit price tag. With average daily volume of nearly 2.2 million shares, more than $300 million worth of stock is changing hands each day. This is the kind of liquidity large institutions like to see in a market-leading growth stock. 

How high can VRX go? 

When shares broke above resistance in early January, they resolved an almost year-long basing pattern with a top at $148 and a bottom just under $107. Using the height of that range and adding it to the breakout level yields a target of $189. But given VRX’s strong momentum, I see shares rising to round number resistance at $200 before pausing by this summer, which is nearly 25% above current prices.

And that may be just the beginning. Over the past six months, VRX’s price action has earned it a relative strength (RS) rank of 90 out of a possible 100. This puts its performance in the top 10% of the equity market.

It is this combination of outstanding fundamental growth and momentum that earned VRX a place in the Extreme Growth Portfolio of my Alpha Trader service. 

That’s no small feat. To be included in this portfolio, a stock must meet stringent criteria. 

What criteria, you ask? 

Well, in addition to companies growing earnings at above-average rates, I am using a technical trigger and a fundamental trigger that, when combined, give me a stock’s Alpha Score. The Alpha Score was designed as a way to spot stocks in strong bullish trends before they made significant moves higher. 

And it works. Other names in the Extreme Growth Portfolio are up 74% in just over six months and 56% in less than four months.

Only a few hundred people know about the Alpha Score, because it has been proven that when too many people know about an indicator, it can lose its effectiveness. That’s why I am extremely protective of the Alpha Score. I’ll never reveal it to the general public, but I have agreed to let a few hundred more people in on the secret.

If you want to learn more, we’ve compiled a free report that explains how I’ve been using this powerful indicator to spot stocks before they make huge runs in a matter of weeks or months. Click here to access it.