How to Trade Biotechs Based on the JP Morgan Health Care Conference

The one industry that is not significantly suffering during these uncertain economic times is health care. Currently in San Francisco, JP Morgan JPM is hosting a health care conference, laden with bankers and leaders across health care. As a result, is it possible for outsiders to trade biotechs, understand the industry, and directly benefit from the conference?

While people may not require a growing financial services or real estate industry, health care will always be in demand and will likely continue to grow into the future. Ultimately, investors need to figure out which health care stocks will deliver the best medium or long-term returns.

Many large-cap pharmaceuticals offer diminished returns. Companies like Pfizer PFE, Merck MRK, and Novartis NVS all have impressive product offerings but are extremely mature. In the event any one of these mature companies produces a large blockbuster drug, the returns garnered would be fairly minimal. While they would certainly add to the bottom line, huge drug releases do not mean as much to large-cap companies as they do for small-cap companies.

Keeping the law of diminishing returns in mind, investors may want to consider small-cap pharmaceutical companies. However, one major thing to remember is diversification. Having multiple revenue streams is definitely important for large and small companies alike. A small-cap diversified pharmaceutical is Hi-Tech Pharmacal HITK. Hi-Tech specializes in manufacturing and marketing drugs that fall under the generic, prescription grade, and over-the-counter categories.

To learn more about Hi-Tech Pharmacal's product offerings, Benzinga reached out to Timothy Chiang of CRT Capital.

According to Chiang, "what makes Hi-Tech a good investment over other small-cap pharmaceuticals is that it is a big player in a small niche. Its drugs tend to be liquid treatments. While the company has a patent portfolio that covers many types of medicine, Hi-Tech seeks to find drugs that offer patients an easy delivery mechanism."

Having a diverse product line that makes life easier for the targeted demographic is always something investors want to see. After all, it is this particular philosophy that drove the success of companies like Apple AAPL and Google GOOG. However, why does that mean that this company is better than large, trusted pharmaceutical firms like Pfizer and Merck? Chiang states that "Hi-Tech Pharmacal operates in a different industry altogether. Pfizer and Merck are not direct competitors, and their gains or losses will not directly affect Hi-Tech's performance. What you should look at is a list of small companies that offer similar products. When you do, those other stocks are extremely volatile and do not have nearly as large a product suite as Hi-Tech. Interest in Hi-Tech also seems to be trending upwards while other pharmaceuticals have waning momentum."

For many investors, a deeper look into the company's historical performance is helpful. Over the last five years, the annual revenue figures have been consistently increasing; cost of goods sold slightly increased, resulting in growing margins. Ultimately, the company has been able to increase net income year over year. From having a negative EPS in 2007 and 2008, the company now has an annual EPS of $3.29.

Everyone says that cash is king. Is Hi-Tech's cash position positive for investors? Cash flow from operations has steadily increased over the years. While net income is definitely a factor, positive changes in working capital have continuously bolstered Hi-Tech's operational cash flow. Capital expenditures are fairly minimal for the company. However, in the last two years, Hi-Tech has purchased some intangible assets, which probably means patents and other product portfolios. Ultimately, total cash has been progressively positive for the company.

Accordingly, the balance sheet has strengthened. With a strong cash position along with increased current assets and property, plant, and equipment, Hi-Tech seems to be growing over time. Without short-term or long-term debt, Hi-Tech seems to be operating a lean machine that has been adding value to shareholders for years. This is evidenced by mildly growing liabilities but rapidly growing retained earnings.

Lastly, some investors may want to look at the bare metrics. In terms of value, price/earnings, price/book value, and price/sales are all lower than the average of its competitors. Moreover, the company has a return on equity of about 27.4% while competitors average a return of about 10.3%. In terms of growth metrics, revenue growth alone with net and operating margins have increased over the years and are higher than competitors' numbers. Lastly, many pharmaceuticals use a fair degree of leverage. In the case of Hi-Tech Pharmacal, the debt/equity ratio is virtually 0.

Hi-Tech Pharmacal may be of interest to some investors. It is a small-cap pharmaceutical that offers investors the prospect of future growth in a niche industry. With impressive historical performance, Hi-Tech Pharmacal may be able to continue growth and grapple more market share. With positive sentiments shared by Wall Street analysts, the small pharmaceutical may eventually break from the small-cap category and grow into a full-fledged pharmaceutical with an impressive patent portfolio.

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