LGND - time to buy a strong free cash flow generator

Ligand’s business model is based on drug discovery, early-stage drug development, product reformulation, and partnerships. The company’s revenue consists of three primary elements: royalties from commercialized products, license and milestone payments, and sale of its trademarked Captisol material. It’s Net Margin is 73%, Return on Capital is 770%, and it is currently traded at 14.5 x Free-Cash-Flow.

In my last update on fundamentals if biotech companies dated 25 November 2018 LGND was one of my picks. I liked outstanding profitability of the company specifically its 81% Free Cash Flow margin. But back then I did not consider to buy that stock because valuation was too high. Specifically, it was traded at x18.7 Free-Cash-Flow. And I do not touch companies until that ratio falls under 15. This is a great example of my investing philosophy. I learned value investing in its alma mater in Columbia University in New York. But value investing answers the question “What to buy?”. It does not address the second important question for any investor which is “When to buy?”. This is why I actively use Harmonic Elliott Wave analysis, which is in my opinion, is the best tool for prediction market moves!

Since my last post in November 2018 LGND dropped from $160 to $117. That made the stock attractive to such a picky guy like me. So currently LGND is traded at 14.5 x Free-Cash-Flow. Attractive enough to spend time to conduct the Harmonic Elliott Wave analysis.

LGND - weekly chart updated on 18 January 2019

Off the 2001 low LGND rallied in a huge [A]-[B]-[C] formation that I count as wave [ 1 ] up. That wave [ 1 ] up topped in September 2018. Off that top we should see a corrective wave [ 2 ] down that should be shaped as [A]-[B]-[C] down. That sharp drop is clearly wave [ A ] down. Please note that it tagged a very important 66.7% retracement ratio. That simply means that this 3 month drop erased 2/3 of the rally that lasted seven years!!!

The minimum upside target is $141. It is a minimum 23.6% retracement of that wave [  A ] down. and that move would setup a head and shoulders formation . However, more likely scenario is that wave [ B ] up would stretch at least to $173 retracing 41.4% of the drop in the wave [  A ] down.