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What are we looking for?

U.S. biotech and pharma stocks with strong revenue growth and reasonable valuations.

Health care is now the best-performing U.S. sector in 2020, with the Health Care Select Sector SPDR Fund (XLV) declining only 1.95 per cent year-to-date. Digging deeper, we have identified subsectors biotechnology and pharmaceuticals leading the pack.

The screen

We begin by setting a minimum market capitalization threshold of US$10-billion to focus on larger, more established companies in the biotech and pharmaceutical industries.

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Next, we will look for companies with strong revenue growth as evidenced by their last quarterly reported revenue. We will select companies with quarterly revenue up 5 per cent or more from the same quarter a year ago.

To ensure we don’t overpay for our investments we will use three valuation metrics. First, we will filter for companies with a return on equity of 10 per cent or more. ROE is a measure of how effective a company’s management is at converting invested capital into income. Finally, we will set an upper limit on the price-to-sales ratio of 10 and an upper limit on the debt to capital ratio of 0.85. The lower the ratios, the lower the overall financial risk level of the company.

We have also included price-to-earnings and dividend yield for your reference.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.

What we found

Topping our list is Humana Inc., one of the largest private insurance health insurers in the U.S. The company has built a niche specializing in government-sponsored programs. Its stock price has maintained an impressive uptrend for more than a decade. Humana produced the strongest results across all of our value criteria.

Merck & Co. Inc. makes pharmaceutical products to treat several conditions in a number of therapeutic areas including cardiovascular disease, asthma, cancer and infections. The company also has a substantial vaccine business and is actively engaged in scientific efforts to help find solutions to the coronavirus. It has the largest market cap on our list at US$202-billion, the highest return on equity of 37.4 per cent and the largest dividend yield at 2.9 per cent. The company’s price chart is also quite impressive as it has maintained an uptrend since 2009.

It should be noted that two prominent names missing from our list, Johnson & Johnson (market cap US$403-billion) and Gilead Sciences Inc. (US$102-billion), satisfied all our screen criteria with one exception: revenue growth, which in both cases came in at less than 2 per cent.

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The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.


Select U.S.-listed biotech and pharma stocks

CompanySymbolMkt. Cap. (US$ Bil.) P/EDiv. Yld. (%)ROE TTM (%)Price/SalesDebt/CapitalRev. Growth (Last Qtr. vs. Prior Yr.)YTD Perf. (%)1Y Perf. (%)Recent Price (US$)
Humana IncHUM-N48.518.30.624.40.760.2915.01.146.9367.17
AmerisourceBergen Corp.ABC-N17.827.91.821.60.100.555.43.416.786.5
Anthem Inc.ANTM-N66.314.21.316.00.660.3617.3-12.94.8262.96
West Pharmaceutical Svcs.WST-N12.653.00.318.26.970.1711.413.247.7184.96
Merck & Co. Inc.MRK-N202.021.02.937.44.410.477.9-12.17.081.35
ResMed Inc.RMD-N23.351.41.021.68.380.3813.13.858.2160.92
Agilent Technologies Inc.A-N23.330.90.915.54.530.275.7-11.9-0.875.17
Teleflex Inc.TFX-N15.534.00.416.76.060.406.1-11.319.8334.03
Stryker Corp.SYK-N68.233.21.217.04.640.448.8-13.3-1.7181.92
Zoetis Inc.ZTS-N59.740.50.661.39.680.697.0-4.924.4125.81

Source: Trading Central

Gary Christie is head of North American research at Trading Central in Ottawa.

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