At a time when the imminent rate hike in December has once again made investors cautious about its consequences on the investment world, events took a turn for the worse last Thursday. The healthcare equity market witnessed tremendous instability on the day, which disrupted the characteristic lull in this niche. Thanks to United Health’s slashed full-year guidance, on grounds of larger-than-expected loss owing to the much debated Affordable Care Act or Obamacare.
The disclosure of the largest U.S. health insurer’s expectation of a loss of up to $425 million or 26 cents per share, on account of the Obamacare plans in 2015, and its subsequent decision to entirely quit Obamacare after 2016 has raised alarm with regard to the entire situation. This has once again triggered doubts about the sustainability of Obamacare, creating tremendous uproar in the entire industry.
While UNH dropped 5.6% following the news, other major insurance and hospital stocks like Anthem, Aetna, Cigna, Community Health Systems, Tenet Healthcare and HCA Holdings also witnessed severe downturn. Needless to say, the entire health care industry was hit hard, with health care service providers, in particular, bleeding badly. The severity of this status quo can be measured by the statement of a Leerink Partners analyst, “We expect [UnitedHealth] and other plans will exit Public Exchanges in 2017 if they are unable to reach break-even in [the first half of 2016].”
Although the market started rebounding from the next day, the incident has raised doubts regarding the credibility of the Affordable Care Act in its entirety, otherwise originally created to provide subsidized health insurance coverage. With the presidential election approaching, this incident, as usual, has added additional impetus to the already ongoing hullabaloo. The Democrats and the Republicans now have yet another reason to dig out at each other.
Time to Hold On?
In the face of such odds, before we scurry in panic, let’s realize that there is no dearth of growth drivers in the space. Healthy merger and acquisition trends, encouraging industry fundamentals, promising new drugs, growing demand in emerging markets and ever-increasing healthcare spending are crucial factors that make the health care space a lucrative bet in the long term.
5 Attractive Bets
We believe last week’s market sluggishness has created an amazing opportunity for investors in the healthcare space. While the market is still down, following the right screening options may lead to an array of undervalued stocks that promise strong upside potential, offering investors a scope to reap impressive profits down the line.
The first thing that comes to mind, when determining whether a stock is overvalued or not, is its price-to-earnings (P/E) multiple. We hereby shortlist healthcare stocks with forward P/E ratio trading below 15x. Standard criterion holds that, anything under 15x will be dirt cheap.
Additionally, we zero in on those stocks fulfilling the above criterion that also carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). This ensures earnings estimates are on the rise.
Here are five stocks that match all necesary parameters:
Gilead Sciences, Inc.
This leading biopharmaceutical company Gilead Sciences, Inc. (NASDAQ:GILD) has so far scored well with its blockbuster HCV drugs, Sovaldi and Harvoni, which were well received in the market. Besides, Gilead’s product portfolio and pipeline of investigational drugs are extremely impressive with treatment options for HIV/AIDS, liver diseases, cancer, inflammatory and respiratory diseases and cardiovascular conditions. Strong performances from these products should rake in better-than-expected revenues.
This Zacks Rank #2 company trades at a forward P/E of 8.91, while the industry as a whole currently has a forward P/E of 24.8. Moreover, its P/S ratio of 4.88 also remains discounted to the industry average of 15.32.
This global pharmaceutical company Mylan (NASDAQ:MYL) so far has had a successful run, buoyed by a deep generic pipeline. The company’s generic segment has been performing impressively. The potential launch of new generic drugs should boost revenues significantly. Mylan is also developing biosimilars, which are generic versions of biologic drugs.
Biosimilars are expected to be significant growth drivers in the generics industry in 2015 and beyond. We are also looking forward to the company’s recently completed acquisition of certain women’s healthcare businesses, now known as Jai Pharma, which will bring to Mylan a broad women’s care portfolio.
The valuations are pretty favorable for this Zacks Rank #1 company. It trades at a forward P/E of 11.82, while the industry as a whole currently has a forward P/E of 18.15. Another encouraging fact to go along with Mylan’s P/E is its PEG, which is currently 1.32. Mylan has a price to book ratio of 2.57.
Indivior (OTCMKTS:INVVY) is a specialty pharmaceutical company working on transforming addiction from a human crisis to a recognized and treatable chronic disease, worldwide. Based on its global opioid dependence portfolio, Indivior has a pipeline of product candidates designed to both expand its legacy in this category and address other chronic addictions – including opiate overdose, alcohol use disorders and cocaine intoxication.
This Zacks Rank #2 stock trades at a forward P/E of 8.98, while the industry as a whole currently has a forward P/E of 23.93.
This strategic software solutions provider OmniComm Systems, Inc. (OTCMKTS:OMCM) is a prominent name in the life sciences industry. The company provides comprehensive solutions for clinical research, especially in the field of pharmaceuticals, biotechnology, contract research organizations, diagnostic and device firms, and academic medical centers, with an aim to maximize the value of their clinical research investments.
The stock carries a Zacks Rank #2 with forward P/E of 4.0 (compared with the industry average of 29.44). P/S remains attractive at 0.75 (4.98).
We are upbeat about this leading air medical transportation company Air Methods (NASDAQ:AIRM), particularly led by its better-than-expected third-quarter 2015 results. Air Methods also announced the acquisition of Tri-State Care Flight, which is a transport provider catering to Arizona, New Mexico, Nevada and Colorado critical care markets. The transaction is expected to be immediately accretive to Air Methods’ earnings in excess of 20 cents per share in the first year and by more than 30 cents per share in the second.
This stock, with a Zacks Rank #1, looks attractive with a forward P/E of 14.73 (compared with the industry average of 22.42).