A PHARMACEUTICAL CINDERELLA

me market analysts view AZN as a poor stepchild to the major pharmas like Glaxosmithkline. AZN was just never as pretty as its peers, and some analysts applied an across-the-board 10% discount to its valuation. However, S&P did a sharp U-turn three weeks ago following the company’s recent annual business review. So convinced was S&P by the plans of AZN’s senior management that it promptly took AZN from a "sell" to a "buy" overnight. That’s a rare endorsement from a normally skeptical analyst community.

AZN has performed exceptionally well since then, and here’s why I believe it will continue to do so:

AZN is focused on six major therapeutic areas: cardiovascular (CV), gastrointestinal (GI), infection, neuroscience, oncology, and respiratory and inflammation. Like many other pharma majors, it’s also engaged in the research, development, manufacture and marketing of medical devices and implants for use in health care.

In its presentation, AZN outlined how it will grow its top line, better manage costs, and develop its pipeline. AZN’s biggest products like Symbicort, Crestor and Seroquel are AZN’s bread and butter, driving growth across the whole business. These trends should not only continue but also grow over the next five years. All this, despite growing generic competition.

The future also looks bright. Unlike many U.S.-based counterparts, AZN currently has 38 compounds in its pipeline, including late-stage treatments for stroke, heart disease and cancer. And David Brennan, AZN’s chief executive, noted how his company plans to augment its pipeline by a renewed focus on in-house research and development. That also means a commitment to pursuing products and technologies from "external sources," including build a "major international presence" in the research and development of biological therapeutics.

What will propel AZN’s stock further upward from here? AZN is using $4.5 billion in free cash to buy back stock and pay dividends (it has a 2.2% yield). This should further support the stock price. More cash, more buybacks, less outstanding stock, higher earnings per share. Simple, really…

Luckily, AZN’s future also comes at a relatively cheap price. It has a lower price earnings to growth (P.E.G) ratio than any of its competitors at 1.71 — putting it at less than half of, say, its embattled U.S. rival, Merck.

So buy AstraZeneca (AZN) at market today, placing your stop at $54.40. For possibly even bigger upside, buy the October $60 call options (AZNJL.X)

PORTFOLIO UPDATE

Mistubishi UFJ (MTU) is up just under 10% since we recommended it three weeks ago, with the options up 50%. Take half your profits here on the options here, but hold on to the rest for even bigger gains.

Cognizant Technologies (CTSH) stock has also jumped about 7%, and the options are up a whopping 57% — an amazing return in this kind of a market. Take half your profits in the options here.