11 U.S. stocks to seize the underperformance of the Health Care sector

What are we looking for?
For Canadian investors who predominantly focus on the domestic market, the health care sector may pose challenges because of its limited presence on the TSX. However, with the U.S. sector underperforming this year, with only a 2.2-per-cent increase compared with the S&P 500′s 15.1-per-cent gain, now might be an opportune moment to explore investment opportunities south of the border.

The screen (add the screener here)
We screened U.S. stocks in the health-care sector focusing on the following criteria:

  • Market capitalization greater than US$5-billion;
  • StockPointer (SP) score higher than 60 – the score mainly considers risk-adjusted return on capital, earnings-per-share growth and free-cash-flow per share. The score varies between zero and 100. A score of 60 implies a better-than-average company;
  • Relative Economic Performance Index greater than 0.6 – Relative EPI is a calculation that compares the profitability of a company with its valuation and cost of capital. Higher profitability, a lower valuation and a lower cost of capital increase the ratio;
  • For informational purposes, we have also included three-month and 12-month NOPAT (net operating profit after tax) growth, five-year free-cash-flow to capital, one-year price performance and dividend yield. Please note that some ratios may be shown as of the end of the previous quarter.

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What we found

U.S. Health Care stocks

McKesson Corp., a diversified health-care company involved in products and services, has shown impressive growth, with 12-month and three-month NOPAT growth of 52 and 11.7 per cent, respectively. While the NOPAT surged, the share price rose by a reasonable 28.3 per cent. Additionally, the company has maintained an average free-cash-flow to capital of 12.5 per cent, the highest of our screen. These robust metrics have contributed to a significant SP score of 82.

Biogen Inc. , a well-known company in the biotechnology industry, has demonstrated vigorous growth in its NOPAT, with remarkable 12-month and three-month NOPAT growth of 62.9 and 4.6 per cent, respectively. The company’s relative EPI of 1.1 suggests a favorable trade-off between profitability, valuation and operating risks. The company has a P/E ratio of 13.1, the second among our screened companies, while its average free-cash-flow to capital stands at 12.1 per cent, ranking it as the second highest in our list.

HCA Healthcare Inc.  is a prominent operator of health-care facilities. While the company has witnessed a slight decline of 3.6 per cent in its 12-month NOPAT, the market could view this as a short-term setback, considering the company’s impressive 71-per-cent increase in its share price over the past year. The three-month growth of 2.4 could confirm this investment thesis. Moreover, with a reasonable P/E ratio of 14.8, the company’s valuation remains favourable for investors who seek to establish a position after the price surge. The SP score stands at 83, the highest of our list.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Anthony Ménard, CFA, is vice-president of data management at Inovestor.

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