Seeking relief from an overheated U.S. market

The Globe and Mail, Number Cruncher

By Peter Ashton

Friday, November 10th 2017

In the Globe and Mail, Peter Ashton uses Strategy Builder to look for reasonably valued U.S. health-care stocks poised for growth. 

What are we looking for?

Reasonably valued U.S. health-care stocks poised for earnings growth.

Over the past year, this sector has underperformed the broader market by a fairly wide margin: Health-care stocks have risen approximately 11 per cent compared with more than 25 per cent for some sectors such as technology, industrials and consumer goods. After a strong start following Donald Trump’s surprise election last fall, health-care stocks have languished under uncertainty over attempts to reform the Affordable Care Act (Obamacare) and possible regulation of drug prices. In the context of an overheated U.S. market, health-care stocks now represent an interesting opportunity.

The screen

We will be using Trading Central's Strategy Builder to search for U.S. health-care stocks with reasonable valuations and set for continued earnings growth. We begin by setting a minimum market-capitalization threshold of$15-billion (U.S.) to focus on larger, more stable and established companies in the sector. Next, we will look for companies that are currently reasonably valued based on their forward price-to-earnings ratios. We will select only stocks with P/E ratios below 25. We will also look for stocks with projected earnings-per-share growth rates this year of at least 10 per cent.

Finally, in order to select stocks that are preferred by analysts, we will filter on companies with analysts’ consensus ratings of either buy or strong buy.

What did we find?

Topping our list is pharmaceutical provider Allergan PLC, maker of generic and branded drugs such as Botox. Allergan stock is down more than 30 per cent from July when it announced second-quarter results showing a higher-than-expected loss in the quarter. Despite this setback, a consensus of analysts covering the stock still rate it a buy. The company has a projected EPS growth rate of 20.3 per cent this year.

Celgene is another pharmaceutical giant whose share price has suffered recently. Celgene released third-quarter results on Oct. 26 in which the company lowered its guidance on revenue for the coming year. This resulted in a one-day decline of 16 per cent for the stock. This drop erased one year of gains and has left Celgene with a very attractive forward P/E ratio of 13.9.

The largest company on our list is Abbott Labs, a pharmaceutical giant with a large portfolio of branded drugs. In spite of its size, Abbott is projected to grow earnings by 13.4 per cent this year and has a consensus analyst rating of buy.

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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