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What are we looking for?

U.S. health-services stocks with strong profitability and reasonable valuations.

So far, 2017 has been a wild ride for U.S. investors. With the markets up about 2 per cent year to date, there have been some surprising differences between investor expectations and reality.

Nearly everyone expected a strengthening U.S. dollar in 2017 with the prospect of rising U.S. interest rates. In fact, the dollar index has dropped by 3.3 per cent year to date.

In another surprise, U.S.-listed health-care stocks, which were expected to sag with the repeal of Obamacare, have actually moved upward by 2 per cent since the start of the year. Might U.S. health-care stocks be poised to continue surprising investors in the coming months?

The screen

We begin by setting a minimum market capitalization threshold of $2.5-billion (U.S.) to focus on larger, more established companies in the health-services industry.

Next, we will look for companies with strong profitability as demonstrated by their projected earnings-per-share growth rate (based on analyst estimates) and their return on equity.

We will screen for forward EPS growth rates of 10 per cent or more and return on equity of at least 10 per cent.

Finally, to ensure we don't overpay for our investments, we will also set a threshold on forward P/E ratio of 22 or less.

More about Recognia

Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions.

Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.

What did we find?

Express Scripts Holding Co. is a pharmacy benefit manager based in St. Louis, Mo. The stock has had a disappointing year, down about 1 per cent in the past 12 months. This has resulted in a very attractive forward P/E of just 10.6 – the lowest on our list. In spite of its past missteps, analysts have a positive view of the company's business with an estimated EPS growth rate of 15.5 per cent for the coming year.

The largest company on our list by far is UnitedHealth Group Inc. The company's stock has been on a run for the past year – up about 41 per cent, including 1 per cent year-to-date in 2017. On Jan. 17, the company released fourth-quar results that surpassed analysts' expectations for both revenue and earnings.

The highest return on equity on our list belongs to INC Research Holdings Inc., a Raleigh, N.C.-based provider of clinical trial services. The company's stock is up about 37 per cent in the past year. With a return on equity of 38.4 per cent and a projected EPS growth rate of almost 25 per cent, the stock looks poised for future stock price appreciation.

Historical performance

Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past.

Using a five-year historical period with quarterly rebalancing, the screen described had a 20.9 per cent annualized return compared to 11.3 per cent for the S&P 500.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments.

Investors should conduct further research before investing.

Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.

Select U.S. health services stocks

RankCompanyTickerMarket Cap ($Bil U.S.)Fwd P/E RatioROEEPS Growth (Proj. This Yr vs Last Yr)Dividend Yield
1Centene Corp.CNC-N$10.814.518.3%43.2%0.0%
2Express Scripts Holding Co.ESRX-Q$42.510.613.2%15.5%0.0%
3Healthsouth Corp.HLS-N$3.515.531.1%14.3%2.5%
4UnitedHealth Group Inc.UNH-N$154.320.420.0%18.2%1.5%
5Laboratory Corp of AmericaLH-N$13.815.411.3%11.1%0.0%
6Humana Inc.HUM-N$29.621.212.8%23.0%0.6%
7INC Research Holdings Inc.INCR-Q$2.821.638.4%24.9%0.0%

Source: Recognia