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The market has been on fire lately, but one group that hasn’t participated is generic drugmakers.

As you probably know, generic drugmakers produce copies of name brand drugs after the original manufacturers’ patent has expired, usually 20 years after the patent was first granted. Generic drugs are big business. In the U.S., around 80 percent of all drug prescriptions are for generics.

Generic drug sales spike when the patents expire on big selling drugs such as Pfizer’s Lipitor which had annual sales in the $9 billion range before it went off patent in November 2011. Last year, drugs racking up $35 billion of sales went off patent, making it a big year for generic drugmakers. This year not so much. It has been estimated that only about $17 billion of drugs, in terms of sales, will go off patent. That’s why generic drug stocks have so far missed this year’s rally.

Buy Low - Sell High
But, trees don’t grow to the sky. Eventually, this year’s hot stocks will top out. Then hedge funds and other big players will rotate into categories that they deem overlooked or undervalued. That’s when generics will have their day. But you can’t wait until they’ve started their move before getting in. If you try that, you’ll miss most of the rally. It’s better to get into a sector when it’s out of favor, as is the case now.

Finding Generic Plays
I’ll show you how to use Zack’s Investment Research’s Custom Stock Screener to pinpoint generic drugmakers worth considering.

From Zacks homepage (www.zacks.com), select Screening and then Custom Stock Screener. Zacks’ screener offer a variety of selection parameters, most are free, but a few require a premium subscription. All of the selection parameters that we’ll use are free.

Zacks organizes its selection parameters into categories such as Broker Ratings, Margins & Turnover, Company Descriptors, etc. Start by selecting the Company Descriptors category.

Pick Industry
Use the dropdown menu on the Industry row to select “Med-Generic Drug” and click on the “Add” button to add that requirement to the screening rules.

Not Too Small
Market capitalization, a company size measure, is how much you’d have to shell out to buy all of a company’s shares. Market-caps range from as low as $40 or $50 million to as high as $400 billion or so. For instance, the last time I looked, Apple’s market-cap was $405 billion.

For generic drug makers, there’s nothing wrong with small players. In fact, they probably have the best growth prospects. But the smaller the company, the greater the chance of something going wrong. So we’ll rule out the smallest players by setting our minimum market-cap at $500 million. Do that by selecting the Size & Share Volume” category, then “>=” (greater than or equal) in the “Market Cap” row, and enter $500 million for the value. Finally click “Add.”

Not Too Cheap  
Although tempting, very cheap stocks are usually bad news. Select the Price & Price Changes category. On the “Last Close” row, and enter 5 for the value to require stocks trading for at least $5 per share. Change your minimum to $10 if you want to cut your risk.

Selling Anything?
The last thing you want are companies with great stories to tell, but aren’t really selling anything. Select the “Income Statement & Growth,” and require minimum Annual Sales of $250 million to limit your list to real companies with real businesses.

Got Growth?
Our best candidates will be stocks with the best growth prospects. Stock analysts forecast the long-term (three to five years) average annual earnings growth for the companies that they follow. In the “EPS Growth” category, select “Long-Term Growth Consensus Estimate” and enter “10” to require at least 10 percent for expected future annual earnings growth.

Candidates
My screen listed four generic drugmaker candidates.

* Akorn (AKRX): Based in Illinois, with $255 million in annual sales, Akorn makes focuses on the areas of ophthalmology, antidotes, anti-infectives, and pain management. Expected annual earnings growth: 24 percent.

* Impax Laboratories (IPXL): Based in California, with $580 million in annual sales, Impax specializes in controlled-release versions of brand-name products. Expected annual earnings growth: 28 percent.

* Mylan (MYL): Based in Pennsylvania, with $6.8 billion of annual sales, Mylar, one of the largest generic drugmakers, produces a wide variety of products. Expected annual earnings growth: 11 percent.

* Doctor Reddy’s (RDY): Based in India, with $1.9 billion of annual sales, Doctor Reddy’s produces a variety of products that it markets in the U.S., India, Europe and Russia. Expected annual earnings growth: 25 percent.

As is the case with any screen, consider these stocks to be research candidates, not a buy list. As always, the more you know about your stocks, the better your results.

4/7/13