Four Stocks to Beat the Sell-Off: Eli Lilly & Co. (LLY), CVS Caremark Corporation (CVS), Beam Inc (BEAM)

The rally from November lows has pushed many stocks toward rich P/E valuations, although the current spate of selling is doing its bit to bring these down.  However, opportunities remain in stocks well positioned to drive to new highs, even as stocks sell off around them.

Eli Lilly & Co. (NYSE:LLY)

Eli Lilly & Co. (NYSE:LLY) took off in 2012 but holds a reasonable P/E ratio; its 14.8 compares favorably to an industry average of 18.5.  This despite a fall in revenue for 2012: dropping from $22.6 billion to $22.3 billion, which included a revenue miss in Q3 of 2012.  The drop in revenue was attributed to a patent exclusivity loss for Zyprexa (except in Japan).  This brought a 10% drop in sales volumes in the U.S. and a 3% drop in Europe.

There is a concern its threadbare drug pipeline will be unable to compensate for patent exclusivity losses.  However, there were six approvals for drug treatments for Europe, Japan and Canada, which will open new revenue streams for existing drugs.  There are 13 molecules in Phase III trials, which may provide positive outcomes – although it’s best to exclude these unknowns for now from the revenue scheme.

The big challenge will be the end of patent exclusivity for Cymbalta in December 2013.  The drug accounts for a quarter of Eli Lilly’s revenue.  Despite the risks, the company still expects to meet minimum financial targets through 2014.

The secret weapon could be its Animal Health Business, which added $2 billion in revenue.  This will become a larger component of earnings as earnings from its traditional drug sector fall (from loss of patent protection).

Expectations for Q1 are on a par with Q1 of 2011 at $5.7 billion, which is ahead of reported $5.6 billion from Q1 in 2012.  With a negative PEG and forward P/E of 19.7 there are risks, but the potential revenue loss from Cymbalta may be overstated given the relative impact on the Zyprexa patent expiration, at least in the first year.

Beam Inc (NYSE:BEAM)

Beam Inc (NYSE:BEAM) did catch the early part of the December buying wave, but since mid-December the stock has stuck around $62 without mounting a serious challenge on breaking to new highs (beyond $65). The stock trades with a P/E of 26.2 compared to the industry average of 18.6; the higher P/E valuation is not unusual for a stock sniffing a move to new highs.

The company wisely reversed its decision to water down its whiskey.  Interestingly, while a hot news topic, investors were little moved by the story, and the stock remained tied to its $62 anchor.

The company has had a good run since been spun off from Fortune, but it’s well positioned to reward the faithful again. Comparable sales in 2012 were up 6%, exceeding its earnings target and that of analysts. Its bourbon division remains its core business, and has enjoyed the fastest growth over the past 2 years (which makes the company’s initial decision to water Maker’s Mark down ever more baffling).  Beam’s scotch, cognac and tequila brands perform strongly in emerging markets, which complements its core bourbon market.