Health Care Embraces The Recovery

4/13/2015


As a group, health-care stocks don't look especially appealing. Health-care companies in the S&P 1500 Index average Quadrix Overall scores of 56 — below the average of 60 for the broader index — with subpar Value scores of 40.

But as a group, health-care stocks have demonstrated a strong constitution. As shown below, the health sector has delivered the highest returns of the 10 sectors over the last three and one years, and so far this year. Health care has also delivered the best performance over the last decade.

THE PICTURE OF HEALTH
The S&P 1500 Health Care Sector Index outperformed the other nine sector indexes over the last one and three years, and is leading so far in 2015.
------------------------------- Index Price Change -------------------------------
S&P 1500 Sector
Year-
To-Date
(%)
Rank
Among
Sectors
1 Year
(%)
Rank Among
Sectors
3 Years
(%)
Rank
Among
Sectors
Consumer discretionary
5
2
19
3
69
2
Consumer staples
2
4
15
4
46
5
Energy
(1)
8
(12)
10
8
10
Financials
(2)
9
11
5
54
3
Health care
6
1
27
1
94
1
Industrials
(1)
7
7
7
52
4
Materials
1
5
4
8
35
7
Technology
1
6
19
2
41
6
Telecom
2
3
0
9
21
9
Utilities
(5)
10
8
6
30
8

Health care offers a blend of growth and defensive characteristics other sectors can't match. The sector's sales rose 10.5% over the last year and 7.3% annualized over the last three, second-best among the sectors in both periods. However, despite its excellent growth and price performance, attributes sometimes associated with volatility, returns have been steady. Based on standard deviation, which measures the dispersion of monthly returns around the average, health care was the second-least-volatile sector over the last five and 10 years.

Sometimes stocks with rich valuations lead the market up. Our stock-selection system often misses these moves — which can be irritating in the short term, but such stocks often lead the market back down.

It's easy to ignore groups with unimpressive Overall scores and high valuations. Easy, and foolish, especially when nearly 14% of our roughly 5,000-stock Quadrix universe are in the health-care sector.

Even though we don't find a lot of high-potential health-care stocks these days, in a sector this large we can usually unearth a few with excellent growth, decent values, or both. We currently recommend four health-care stocks, all of which earn above-average Overall and Value scores. Lots of news about our stocks broke this week.

Aetna ($107; AET) grew sales 23% last year, helped by a 6% rise in membership. An acquisition and federally mandated health insurance accounted for the enrollment gains. The company participated in 17 states' public exchanges last year — none of its largest rivals got so deeply involved.

Managed-care stocks in the S&P 1500 Index have outperformed every other industry in the health-care sector, averaging total returns of 66% over the last year. Despite those gains, managed-care stocks average Value scores of 56, well above the sector average of 40.  Aetna's Value score of 66 is the highest among S&P 1500 managed-care companies.

Aetna grew operating cash flow 48% last year; the company has a history of sharing its cash with investors. The dividend rose 11% in November, marking four consecutive years with a double-digit increase. Over the last year, Aetna spent nearly $1.3 billion on stock buybacks, enough to lower its share count more than 4%. Aetna is a Focus List Buy and a Long-Term Buy.


Shares of Gilead Sciences ($100; GILD) jumped 69% from mid-April 2014 through the end of August, lifted by the phenomenal success of its hepatitis C treatment Sovaldi. However, the shares have since fallen 7% despite the October launch of next-generation medicine Harvoni, which cured 90% of patients in clinical trials.

Gilead's treatments still command a dominant share of the hepatitis C market despite competition from AbbVie ($59; ABBV). However, bad news has weighed on the shares. Complaints about the Gilead drugs' price drew heat from consumers and government payers, an issue made worse by reports the drugs cost far less in foreign countries. Then in February, Gilead revealed that it expected the pricey drugs — which have a list price of at least $84,000 for 12 weeks — would sell at an average discount of 46% this year, more than double the 22% discount from 2014. That discounting contributed to Gilead's disappointing sales guidance.

However, analysts still expect Gilead to grow profits 18% this year, and the 8% projection for 2016 seems overly conservative. Plus, you can purchase the shares for just 11 times the 2015 estimate, a 64% discount to the average for biotechnology stocks. Gilead is a Long-Term Buy.


In the last six months of 2014, Mylan ($68; MYL) grew its sales 17% (highest for a six-month period in six years) and its per-share profits 60% (highest in four years). The consensus projects solid profit growth (17%) and even stronger sales growth (28%) this year, helped by the February acquisition of Abbott Laboratories' ($47; ABT) branded specialty and generics business in developed markets outside the U.S.

In recent days, Mylan shares have moved on news such as its proposed purchase of Irish drugmaker Perrigo ($195; PRGO), Abbott's sale of a large chunk of Mylan shares, and the launch of new generic treatments. Headlines aside, we like Mylan because of strength in its core business. At the end of 2014, Buy- and Long-Term Buy-rated Mylan had 283 drugs pending FDA approval, including 44 with first-to-file status.


Last year, Irish drugmaker Shire ($247; SHPG) grew sales 22%, per-share profits 38%, and operating cash flow nearly 200%. Such growth can't continue, but the consensus projects a sharp slowdown this year to 7% growth for both sales and profits — targets Shire should be able to beat.

In October, Shire shares fell 30% in a single day after AbbVie rescinded a takeover offer. Since then, Shire has recovered all of that lost ground. The company bulked up in February with the $5.2 billion purchase of NPS Pharmaceuticals.

Shire may be best known for its attention-deficit hyperactivity disorder medicine Vyvanse, which was approved in February for use in the U.S. However, drugs for rare diseases accounted for more than 40% of revenue last year, and most of the 21 drug programs in clinical development at the end of 2014 focus on such treatments. Shire, also reviewed in Portfolio Review, is a Focus List Buy and a Long-Term Buy.

HEALTH-CARE INDUSTRY COMPARISON
Most health-care industries look fairly expensive in the wake of excellent total returns. Managed-care stocks earn the best Overall and sector-specific scores, and among the best Value scores. Given the health sector's valuation, investors should use caution, sticking to only the most appealing names — such as the four recommendations in the table below. All of the numbers below other than the company count are averages for stocks in a group.
-- P/E Ratio --
- 12-Month Growth -
--- Total Return ---
------------ Quadrix Scores ------------
Group (No. Of Cos.)
Div.
Yield
(%)
Stock-
Market
Value
($Bil.)
Trailing
Vs. 5-
Yr. Avg.
Sales
(%)
EPS
(%)
Oper.
Cash
Flow
(%)
YTD
(%)
1
Year
(%)
3
Years
(%)
Value
Overall
12-
Factor
Sector
Reranked
Overall
Health Care (155)
0.6
19.4
27
1.27
13
6
17
11
35
101
40
56
50
50
   Equipment &
   Services (106)
0.6
10.5
27
1.30
11
5
20
9
30
99
43
57
56
54
      Equipment &
      Supplies (48)
0.6
9.8
28
1.18
7
9
33
10
29
94
35
51
45
42
         Equipment (36)
0.6
12.1
28
1.17
6
10
39
11
31
93
33
50
45
41
         Supplies (12)
0.5
2.9
29
1.21
9
8
16
7
22
98
38
53
46
43
      Providers &
      Services (49)
0.6
12.4
24
1.45
16
4
7
11
37
114
51
65
66
67
         Distributors (8)
1.1
15.9
22
1.26
11
(14)
(20)
10
25
114
43
50
48
49
         Services (20)
0.5
6.5
26
1.33
12
13
11
10
29
103
46
63
67
61
         Facilities (11)
0.5
6.6
21
1.38
20
10
5
7
35
145
60
63
60
74
         Managed Health
         Care (10)
0.4
28.0
28
1.87
23
(3)
25
21
66
101
56
82
84
87
      Technology (9)
1.0
4.0
37
0.90
10
(16)
12
(5)
0
46
44
47
64
44
   Drugs, Biotech & Life
   Sciences (49)
0.5
39.0
27
1.18
18
11
8
16
44
107
33
52
38
42
      Biotechnology (14)
0.1
43.1
28
1.08
21
28
20
12
42
116
29
58
42
46
      Pharmaceuticals (22)
0.8
55.1
27
1.27
21
3
(8)
17
55
120
32
48
27
37
      Life Sciences Tools
      & Svcs. (13)
0.2
8.7
27
1.13
10
8
20
17
29
80
38
54
53
46
Note: Quadrix scores are percentile ranks, with 100 the best.

 

OUR HEALTH-CARE STOCKS
Below we present health-care stocks rated A (above average). Stocks on our recommended lists are presented in green.
-- P/E Ratio --
12-Month Growth
-- Total Return --
--------- Quadrix Scores ---------

 

Company (Price; Ticker)

Div.
Yield
(%)
Stock-
Market
Value
($Bil.)
Trailing
Vs. 5-
Yr. Avg.
Sales
(%)
EPS
(%)
Oper.
Cash
Flow
(%)
YTD
(%)
1
Year
(%)
3
Years
(%)
Value
Overall
12-Factor
Sector
Reranked
Overall
Industry
Aetna ($107; AET)
0.9
38
16
1.62
23
7
48
21
49
125
66
86
78
94
Mgd. care
Amgen
($160; AMGN)
1.5
124
18
1.23
7
5
36
(1)
35
144
47
81
28
79
Biotech
Anthem
($155; ANTM)
1.1
43
18
1.79
4
4
10
24
63
126
64
88
82
96
Mgd. care
Biogen ($425; BIIB)
0.0
101
31
1.17
40
58
25
23
42
225
30
86
49
75
Biotech
Cigna ($131; CI)
0.0
35
18
1.78
8
6
177
26
61
165
58
83
66
89
Mgd. care
Express Scripts
($84; ESRX)
0.0
62
17
0.76
(3)
23
(5)
(1)
16
48
77
77
88
91
Services
Gilead Sciences
($100; GILD)
0.0
159
12
0.66
122
303
313
5
37
313
88
98

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