A prescription for growth in a late-cycle bull market

The Globe and Mail, Number Cruncher

By Peter Ashton

Friday, March 2nd 2018

In The Globe and Mail, Peter Ashton uses Strategy Builder to find U.S. healthcare stocks poised to outperform. 

What are we looking for?

U.S. healthcare stocks that could outperform the broader market in the context of a late-cycle bull market.

With interest rates on the rise, many market watchers believe the bull market is heading into the last of the expansionary phases as the business cycle gets closer to a switch from expansion to contraction. Research by Fidelity's Asset Allocation Research Team has examined which sectors of the U.S. market perform best in the early, mid, late and recessionary phases of the business cycle. Over time, stocks in the energy, materials and health care sectors have tended to out-perform in the late-cycle phase.

The Screen

We will be using Strategy Builder to search for U.S. healthcare stocks that offer reasonable valuations, long-term earnings growth and short-term price momentum.

We begin by setting a minimum market cap threshold of US$5-billion. This will focus our search on medium to large-cap U.S. healthcare stocks that typically have higher quality revenue streams than their smaller counterparts and also have a track record of performance. We will also limit our search to reasonably valued stocks with trailing price-to-earnings (P/E) ratios of 20 or less.

To ensure we focus on firms with growing streams of earnings, we will screen for companies with five-year historical earnings-per-share growth rates of at least 5 per cent a year. Last, to select stocks with short-term price momentum, we will look for stocks trading up 5 per cent or more in the past 13 weeks.

What did we find?

Topping our list is Express Scripts Holding Co., a pharmacy benefit manager based in St. Louis, Mo. The company’s stock has risen 20 per cent in the past quarter and has a very low P/E ratio of just 9.7. Despite a series of missteps in 2017, the company announced fourth-quarter results in late February that beat analyst expectations for both revenue and earnings.

The best 13-week price performance on our list belongs to health care provider HCA Health-care Inc. HCA manages nearly 300 hospitals and free-standing surgery centres in the United States and Britain. The stock is up 23.8 per cent in the past 13 weeks and has advanced 13 per cent year-to-date.

Cardinal Health Inc. is a Fortune 500 company focusing on the distribution of pharmaceuticals and medical supplies. The company has a low P/E ratio of 12.1 and is trading up 17.1 per cent in the past 13 weeks. On Feb. 8, the company announced fourth-quarter results that beat analyst estimates for both revenue and earnings. The stock also has an attractive dividend yield of 2.6 per cent.

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.

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