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What are we looking for?

U.S. health-care stocks that are benefiting from a sector rotation.

Trading Central’s North American research desk is seeing momentum enter the U.S. health-care space as utilities and real estate sectors fall out of favour amid a U.S. equity market rally. The Health Care Select Sector SPDR exchange-traded fund (XLV-NYSE) has returned about 4.5 per cent over the past month, making it one of the top-performing sectors. It also maintains its lead over the past three months, returning 11.6 per cent, edging out the ever-popular Technology Select Sector SPDR ETF (XLK-NYSE), which is up 11 per cent.

The screen

We will be using Trading Central Strategy Builder to search for U.S. health-care stocks with fair valuations and a history of positive earnings growth.

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We begin by setting a minimum market capitalization threshold of US$5-billion to focus on larger, more stable and established companies in the sector. Next, we will select only stocks with price-to-earnings ratios below that of the S&P 500, which has a current P/E of 21. We will also look for stocks that have average annual earnings growth over the past five years of at least 5 per cent to identify companies showing long-term earnings growth.

We have also included annual dividend yield, year-to-date and one-year return for reference.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Trading Central’s product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities. Strategy Builder is available through leading retail brokers in Canada and worldwide.

What we found

Topping our list is Amgen Inc., which is one of the world’s largest independent biotechnology companies with expertise in renal disease and cancer supportive-care products. Morgan Stanley recently resumed coverage of the company with a recommendation of overweight with a price target set at US$280. Amgen currently has 14 buy recommendations, 14 holds and no sells, according to Bloomberg. Looking at price performance, Amgen has the highest one-year price performance on our list, at 30.3 per cent, and a year-to-date return of 24.6 per cent. The stock has been in an uptrend since November with no signs yet of slowing down. The current P/E is at 18.5, impressive considering the stock continues to post record highs this year.

AmerisourceBergen Corp. is a global third-party logistics provider that engages in wholesale pharmaceutical sourcing and distribution of specialty, brand-name and generic pharmaceuticals to hospitals and pharmacies. The company has the best five-year historical earnings per share growth on our list at 28 per cent. The stock is within 14 per cent of its record high.

Trading Central Strategy Builder provides a back-testing 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 an annualized return of 9 per cent, compared with 8.9 per cent for the S&P 500.

The investment ideas presented below 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.

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Select U.S. health-care stocks

RankCompanyTickerMkt. Cap. (US$ Bil.) P/E5Y Hist. EPS Growth Rate (%)Div. Yld. (%)1Y Perf. (%)YTD Perf. (%)Recent Price (US$)
1Amgen Inc.AMGN-Q144.018.514.02.6430.324.6241.85
2Bristol-Myers SquibbBMY-N150.014.314.02.8524.821.562.90
3HCA Healthcare Inc.HCA-N48.615.026.01.1119.617.5146.23
4AmerisourceBergenABC-N17.112.828.01.919.612.383.52
5Humana Inc.HUM-N48.221.19.50.5930.028.3369.00
6Universal Health Serv.UHS-N12.414.610.00.5723.823.3143.68
7Anthem Inc.ANTM-N73.717.212.01.0915.213.0296.54
8Walgreens Boots WBA-Q50.711.617.03.20-21.3-15.657.67
9Cigna Corp.CI-N72.319.115.00.023.25.0199.57

Source: Trading Central

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

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