U.S. health-care stocks are among the profit growth leaders this quarter, and their outlook remains insulated from recent signs of a global economic slowdown. Throw in a slow-moving but powerful demographic tailwind that will boost sales for years to come, and it's clear the time is right to fish for investment bargains in the sector.
In a research report Tuesday, Bank of America quantitative strategist Savita Subramanian noted that health-care stocks, along with the chemicals and technology sectors, have generated the most positive earnings surprises during the current reporting season. With this in mind, I screened the S&P 500 Healthcare Index for attractively valued companies with improving growth outlooks. The table below – featuring the 18 companies where analysts have raised estimates – is the result.
First, I filtered the list by three-month change in analyst earnings estimates, in order to identify the companies with the most rapidly improving profit outlooks. All constituents of the subindex were then screened for trailing 12-month and forward price-to-earnings ratios, as well as trailing three-year average annual growth.
The first thing that's clear from the table is that the sector is flying; the average year-to-date total return for the stocks in the table is 45.6 per cent. Despite this, forward price earnings ratios remain generally attractive because of strong expected growth. (This is particularly true of the health-care insurers like Humana Inc., Cigna Corp and Aetna Inc., but the industry upheaval caused by Obamacare increases risk in the sector.)
All things considered, biotech drug developer Biogen Idec Inc., cardiovascular device maker St. Jude Medical Inc., diversified device producer Covidien PLC and lab equipment maker Thermo-Fisher Scientific Inc. appear the most attractively valued and best candidates for further research.
Investors in health-care stocks can worry less about the global economy than in other sectors, but regulatory risk means these stocks are not risk-free. An increasingly elderly developed world population should, however, support growth for the foreseeable future and, while Obamacare is only now being rolled out, more Americans with health-care coverage could also boost demand.
To view the table on mobile devices, click here: http://bit.ly/1gYrscw