Yahoo Finance 4 Health Care Stocks Poised for Growth
With the June 25 U.S. Supreme Court ruling holding up the legality of the Affordable Care Act, U.S. health care stocks are rallying. Although most of these stocks have done well over the past year, there was uncertainty about their continued growth prospects in light of the possible reversal of the ACA. Now that this issue has been settled, many of these stocks are likely to continue their upward trajectories.
The screen. We used Recognia Strategy Builder to search for U.S. health services stocks that are poised to grow. Health services is an industry consisting of managed health care, hospital management and medical services subindustries. Since many of these stocks have already run significantly in the last year, we focused on companies that are growing, well-managed and reasonably valued.
We began by setting a minimum market capitalization threshold of $5 billion. We focused on the largest and most secure U.S. health care companies in our screen. Next, we looked for companies demonstrating return on equity of at least 10 percent. Return on equity is a measure of how efficiently management uses invested capital to produce income. We also focused on companies that are currently growing their earnings. We selected only companies with earnings growth rates (last quarter versus same quarter in the prior year) of 5 percent or more. Finally, to find companies with reasonable valuations, we focused on companies with trailing price-to-earnings ratios of 25 or less. Trailing P/E ratio is based on recorded earnings over the previous 12 months. Here are the results:
UnitedHealth Group Inc. (UNH) ranks No. 1 on our list. The company is a managed health care firm headquartered in Minnetonka, Minnesota. UnitedHealth has the highest market capitalization of any company on our list at $113 billion. The company is a solid performer in the health services sector with a 32.7 percent earnings-per-share growth rate and 17.4 percent return on equity. In mid-April, the company announced first-quarter results, which impressed investors and analysts. The company also raised guidance for the remainder of fiscal 2015 at that time.
Anthem Inc. (ANTM) is a managed health care company based in Indianapolis. Anthem is the least expensive company on our list by virtue of its low P/E ratio of just 17.5. On June 15, Anthem made an unsolicited $54 billion offer to acquire rival Cigna. Cigna has since spurned this overture despite the fact that it represents a solid premium over the current share price. Anthem stock is up almost 32 percent in the past 12 months.
Cigna Corp. (CI) ranks No. 3 on our list and is perhaps the best managed company, with a return on equity of 19.7 percent. Complicating the offer from Anthem is the fact that Cigna is itself negotiating an acquisition of Humana, which put itself up for sale in May. Cigna stock has been on a great run; it's up 83 percent over the past year and 65 percent year to date.
MEDNAX Inc. (MD) is the smallest company on our list with a market capitalization of just $7.1 billion. Based in Sunrise, Florida, MEDNAX specializes in neonatal and pediatric physician services in 34 states. MEDNAX stock is up almost 29 percent in the past 12 months and as a result, the company finds itself toward the higher end of the P/E range for companies on our list at 23. At the end of April, MEDNAX announced first-quarter results, which beat analyst expectations slightly for earnings but missed on revenue. The stock declined slightly on this news but has since made up all these losses.
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 25.8 percent annualized return, compared with 14.4 percent for the Standard & Poor's 500 index and 12.2 percent for the Dow Jones industrial average.
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 of Recognia is a blogger for The Smarter Investor. You can follow him and Recognia on Twitter at @Recognia_Peter and @Recognia.
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