In October, 2013, I learned the hard way that Canadian investors have little or no interest in market sectors, particularly foreign ones, that they didn't own already. A column I wrote called "Worried about the Global Economy? Buy U.S. Health Care Stocks," was met by widespread reader apathy and generated no attention.
The report featured 18 health care stocks that went on to perform extraordinarily well – profitable enough that another look at the stocks is in order, and a re-run of the stock selection screen that found them.
Two of the stocks on the original list, Covidien PLC and Actavis PLC, were acquired by Medtronic Inc. and Allergan PLC, respectively, at steep premiums.
The average simple return (not including dividends) for the remaining 16 stocks between Oct. 29, 2013, and Aug. 5, 2015, was 57 per cent. Include the change in the Canadian dollar exchange rate, and the return balloons to 77.5 per cent.
The performance did, however, come at a cost in terms of valuation. The average trailing price-to-earnings ratio went from 22.1 times in late October, 2013, to the current 29.9.
The three-stage screen that uncovered the previous list started with most positive upgrades to analyst profit expectations in the past three months – this is to weed out companies where the outlook is deteriorating. The second screen was P/E ratios, based on both trailing earnings and profit estimates for the next 12 months. The last stage, to avoid "one-hit wonders" – stocks that only had one big year – was five-year adjusted average annual earnings growth. In all cases, I was looking for results that were better than the average for the S&P 500 health care index.
There are far fewer stocks that passed the test this time, primarily because the extended rally in the sector has left many at prohibitively expensive valuation levels. The five stocks that made it through the screens were Gilead Sciences Inc., Cardinal Health Inc., Amgen Inc., Express Scripts Holding Co. and UnitedHealth Group Inc.
The usual warnings apply. This is a stock screen, a starting point for research, and does not represent sufficient reason to invest in any of the companies on its own. Nonetheless, there are limited conclusions that can be drawn from the raw numbers.
Biotech firm Gilead has been on a remarkable run with profit growth averaging 39 per cent for the past five years. Gilead has also seen the biggest upgrades in profit forecasts with earnings expectations for the next year climbing 6.4 per cent in the past 90 days.
Health insurers, represented here by Cardinal Health and UnitedHealth Group, have benefited significantly from the rollout of Obamacare legislation and a takeover frenzy in the sector.
Express Scripts, a logistics specialist, highlights the investment opportunities in the efficiency-oriented health care technology field.
Follow Scott Barlow on Twitter @SBarlow_ROB.