What are we looking for?
Profitable ideas from the health-care sector.
The screen
Recent activities targeting health-care companies – from political campaign promises to short-seller research – have investors in the sector evaluating their positioning.
Despite heightened volatility, the S&P 500 health-care index posted a total return of 7.8 per cent in October.
Canada's much more concentrated sector posted a loss of 45.7 per cent, with most of that coming from Valeant Pharmaceuticals International Inc., which was down 49.2 per cent, dragging a number of other businesses down with it.
Following this dislocation of valuations, my colleague Lawrence Ullman and I wanted to uncover some undervalued ideas that may still be positioned for growth.
We used Bloomberg to rank Canadian and U.S. firms from the health-care sector with the best mix of:
– enterprise value to forward earnings before interest, taxes, depreciation and amortization (EV/EBITDA);
– forward free cash flow yield;
– positive return on invested capital;
– Positive three-month consensus earnings estimate revision;
– asset turnover (the ratio of forward sales to total assets).
We limited results to companies with market caps above $500-million (U.S.).
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high net worth individuals, corporations, endowments, charities and foundations.
What we found
We used Bloomberg to perform a back-test starting Oct. 31, 2005, reselecting an equally weighted portfolio of the top 15 qualifying stocks every quarter.
Over the full period, this strategy would have generated an annualized total return of 12.2 per cent compared with 7.8 per cent for the S&P 500 total return index.
The opinions expressed in this report are the opinions of the authors and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates.
Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.
Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.