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What are we looking for?

U.S. health care stocks that could outperform the broader market in the context of a late-cycle bull market.

With interest rates on the rise, many market watchers believe the bull market is heading into the last of the expansionary phases as the business cycle gets closer to a switch from expansion to contraction. Research by Fidelity's Asset Allocation Research Team has examined which sectors of the U.S. market perform best in the early, mid, late and recessionary phases of the business cycle. Over time, stocks in the energy, materials and health care sectors have tended to outperform in the late-cycle phase.

The screen

We will be using Recognia Strategy Builder to search for U.S. health care stocks that offer reasonable valuations, long-term earnings growth and short-term price momentum.

We begin by setting a minimum market cap threshold of US$5-billion. This will focus our search on medium to large cap U.S. health care stocks that typically have higher quality revenue streams than their smaller counterparts and also have a track record of performance. We will also limit our search to reasonably valued stocks with trailing price-to-earnings (P/E) ratios of 20 or less.

To ensure we focus on firms with growing streams of earnings, we will screen for companies with five-year historical earnings-per-share growth rates of at least 5 per cent a year. Last, to select stocks with short-term price momentum, we will look for stocks trading up 5 per cent or more in the past 13 weeks.

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?

Topping our list is Express Scripts Holding Co., a pharmacy benefit manager based in St. Louis, Mo. The company's stock has risen 20 per cent in the past quarter and has a very low P/E ratio of just 9.7. Despite a series of missteps in 2017, the company announced fourth-quarter results in late February that beat analyst expectations for both revenue and earnings.

The best 13-week price performance on our list belongs to health care provider HCA Healthcare Inc. HCA manages nearly 300 hospitals and free-standing surgery centres in the United States and Britain. The stock is up 23.8 per cent in the past 13 weeks and has advanced 13 per cent year-to-date.

Cardinal Health Inc. is a Fortune 500 company focusing on the distribution of pharmaceuticals and medical supplies. The company has a low P/E ratio of 12.1 and is trading up 17.1 per cent in the past 13 weeks. On Feb. 8, the company announced fourth-quarter results that beat analyst estimates for both revenue and earnings. The stock also has an attractive dividend yield of 2.6 per cent.

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.

U.S. health-care stocks offering long-term earnings growth, short-term price momentum

RankCompanySymbolRecent PriceMkt. Cap. (US$ Bil.)Trailing P/E RatioEPS Growth Rate (5Y Hist.)Price Performance (13W)Div. Yield
1Express Scripts Holding Co.ESRX-Q$75.45$42.69.734.5%20.0%0.0%
2Laboratory Corp. of America Hldgs.LH-N$172.70$17.614.115.3%10.0%0.0%
3Humana Inc.HUM-N$271.82$37.416.217.6%8.7%0.6%
4HCA Healthcare Inc.HCA-N$99.25$34.716.711.3%23.8%1.4%
5Cardinal Health Inc.CAH-N$69.21$21.812.15.7%17.1%2.6%
6Universal Health Services Inc.UHS-N$114.20$10.815.712.1%6.3%0.3%
7Mednax Inc.MD-N$54.98$
8Quest Diagnostics Inc.DGX-N$103.05$
9Jazz Pharmaceuticals PLCJAZZ-Q$114.80$
10Encompass Health Corp.EHC-N$53.26$

Source: Recognia