Healthcare Sector, A Funny Thing Happened on the Way to the Election…

By: Investment_U

Marc Lichtenfeld writes: A funny thing happened on the way to the election – healthcare stocks are trading near their all-time highs, having come off those top levels in the sell-off of the past few weeks.

You’d think that with the uncertainty surrounding the election and its impact on healthcare, the sector would be down in the dumps.

But that’s hardly the case.

Major healthcare stocks like Celgene (Nasdaq: CELG), Pfizer (NYSE: PFE), Medtronic (NYSE: MDT), CIGNA (NYSE: CI) and the Health Care SPDR (NYSE: XLV) are all trading near their 52-week highs.

So are there any cheap stocks left in the sector?

Let’s Go to the Screen

Those of you who are familiar with my work know that I’m a fan of stock screeners. I use a powerful screener in my trading service, the Oxford Systems Trader, which has generated outstanding results so far.

For this column, I wanted to find healthcare stocks that are inexpensive. But sometimes in life, you get what you pay for. So I screened for stocks that not only had low price-to-earnings ratios (P/E), but whose businesses were performing well.

First, I searched for healthcare companies whose P/E ratios were lower than the sector average and lower than their own five-year averages. This would provide me with companies that not only were cheap compared to their peers, but inexpensive relative to their own history. I also limited the output to stocks with market caps of $1 billion or more.

But cheap isn’t enough of a reason to buy a stock. It has to be a solid performer so it doesn’t stay a bargain forever.

The next screen was for companies that matched the P/E parameters but were also growing earnings by 10% or more. A profit rising by double digits is typically the mark of a company with decent to strong growth.

The final addition to the screen dealt with return on equity. This metric is the profit generated by each dollar of shareholders’ equity. If a company has $2 million in equity and earns $1 million, its return on equity (ROE) is 50% (net income/shareholders’ equity).

I searched for companies whose ROE over the past 12 months had increased over the past year.

So the entire screen was looking for healthcare companies that were inexpensive relative to their sector and themselves, which were experiencing solid growth and improving their profit per dollar of shareholders’ equity.

Seems like a good strategy when you think about it: cheap, good growth, improving efficiency…

But how would stocks that matched these criteria have performed historically?

I ran a backtest, using the same technology I use in the Oxford Systems Trader. The backtest goes back to January 2, 1999 through today. The assumption is that we hold the stocks and re-evaluate after one year. If a stock still meets the parameters, it stays in the portfolio. Otherwise, it’s out.

Over the nearly 13 years, the S&P 500 rose 16.1%. The stocks meeting the screen rose 564.7% during the same period, beating the S&P in 11 out of the 13 years. Interestingly, it’s been in the past year that these cheap but growing healthcare stocks haven’t outperformed the S&P 500.

This tells me that, should the pattern return to the historical norm, these types of stocks should meaningfully outpace the broad market going forward.

We also know that the stellar results can’t simply be attributed to the fact that healthcare was strong. The sector returned 213.4% during the same period – still trouncing the S&P – but adding the valuation, growth and efficiency parameters generated another 351 percentage points of return over the 13 years.

So here are the nine stocks that the screen identified.

Keep in mind, these are not recommendations. I have not done any analysis on them. They simply came up on the screen of inexpensive but growing healthcare companies.

But they’re probably a good place to start your research.

• Cardinal Health (NYSE: CAH)
• Cerner Corp. (Nasdaq: CERN)
• Quest Diagnostics (NYSE: DGX)
• LifePoint Hospitals (Nasdaq: LPNT)
• McKesson (NYSE: MCK)
• Mettler –Toledo International (NYSE: MTD)
• Sanofi (NYSE: SNY)
• United Health Group (NYSE: UNH)
• Zimmer Holdings (NYSE: ZMH)

Whichever way the election goes, I wouldn’t be surprised to see healthcare stocks continue their advance as the uncertainty regarding healthcare policy will be removed. The demographics of an aging population and the downward slope of our nutritional habits practically ensure strong growth in the sector for years to come.

Good investing,

Marc Lichtenfeld

*Note: Investment U has a commercial relationship with EverBank.

Source : http://www.investmentu.com/2012/October/a-funny-thing-happened-on-the-way-to-the-election.html

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