Skip to main content

What are we looking for?

Undervalued and profitable health care stocks.

The screen

Despite being a seasonally strong month historically, this October has proved to be challenging for the markets. The loss of 1.8 per cent for the month to Oct. 30 for the S&P 500 total return index broke a seven-month streak of positive returns. Health care was one sector that was hit especially hard, dropping 6 per cent in the United States and 10.7 per cent in Canada, as investors were shaken by U.S. election uncertainty, the possibility of rising interest rates and money flowing away from higher yielding assets.

Currently trading at an average forward price to earnings ratio of 14.1, the S&P 500 health care index has seen its valuation come down by about 20 per cent since peaking in 2015. Following a potential dislocation of valuations, my colleague Lawrence Ullman and I researched strategies to uncover undervalued companies that may still be positioned for growth. We used Bloomberg to rank 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;
  • Three-month consensus earnings estimate revision no worse than minus 5 per cent;
  • Asset turnover, that is, the ratio of forward sales to total assets.

We limited results to companies with market capitalizations 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 Sept. 30, 2007, re-selecting an equally weighted portfolio of the top 15 qualifying stocks every month.

Over the full period, this strategy would have generated an annualized total return of 11.7 per cent compared with 6.3 per cent for the S&P 500 total return index and 10.3 per cent for the S&P 500 health care total return index.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. 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 Ltd. is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Ltd.

Select U.S. health care stocks

RankCompanyTickerDiv. Yield (%)Market Cap (US$ Bil)EV/EBITDAFCF Yield (%)ROIC (%)3M EPS Revision (%)Asset Turnover
2HCA Holdings Inc.HCA-N0.
3Express ScriptsESRX-Q0.040.17.311.910.00.72.0
4WellCare Health PlansWCG-N0.
5AMN HealthcareAMN-N0.
6Molina HealthcareMOH-N0.03.10.311.
7Magellan HealthMGLN-Q0.
8United TherapeuticsUTHR-Q0.05.03.812.842.1-1.20.7
9Quintiles IMS HoldingsQ-N0.017.611.
10Taro PharmaceuticalsTARO-N0.
11UnitedHealth GroupUNH-N1.8133.79.47.510.40.91.6
12INC Research HoldingsINCR-Q0.
13Cardinal HealthCAH-N2.721.67.210.611.3-2.03.9
14Gilead SciencesGILD-Q2.597.54.915.948.9-1.70.6
15Chemed CorpCHE-N0.

Source: Bloomberg