What are we looking for?
U.S. health-technology stocks with strong profitability and growth prospects.
Over the past year, the U.S. health care market was the best performing market segment with year-over-year growth of 20.1 per cent. Health care is seen as a defensive sector that may be attractive again in 2015 as investors size up an aging bull market. However, investors should be aware that many of these stocks have already seen very strong gains in the past year – caution and further research is warranted.
The screen
We will be using Recognia Strategy Builder to search for large-cap U.S. health-technology stocks with strong growth prospects and profitable business models. Health technology refers to a broad swath of health care companies, including pharmaceuticals, biotechnology and medical specialty-equipment providers.
We begin by setting a minimum market-cap threshold of $10-billion (U.S.). The U.S. health-technology market is huge and we wish to focus on just the largest and most stable companies in the market. Next, we will look for stocks with growing business as measured by their revenue and earnings per share. We will screen for stocks with projected EPS growth this year of 15 per cent or more based on analyst estimates.
To focus on companies with growing and profitable businesses, we will start by selecting only companies with revenue growth (last quarter versus the same period a year ago) of 10 per cent or more. We will also include only companies with a return on sales of 20 per cent or more. Return on sales is a measure of the net profitability of a company which shows the profit made on each dollar of sales.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas including daily updates on 72,000 investment instruments and 800,000 options contracts. Recognia analyzes data from 85 exchanges worldwide providing technical and fundamental research on stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Gilead Sciences Inc. ranks No. 1 on our screen and is also the largest company with a market cap of $156.6-billion. Gilead concentrates on anti-viral drugs to treat patients with HIV, hepatitis and influenza.
Pharmacyclics is ranked No. 2 on our list and also has the highest projected EPS growth and the highest quarterly revenue growth. The company produces drugs used in the treatment of cancer and immune-related diseases. On Jan. 12, the company released full year guidance that was slightly above analysts' consensus. Since then, the stock has rallied 24 per cent.
Edwards Life Sciences is a maker of artificial heart valves and heart monitoring systems. Over the past 12 months, the stock has rallied more than 87 per cent on solid financial results. When third-quarter results were issued in October, the company beat consensus solidly on both earnings and revenue.
Historical performance
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 22.3 per cent annualized return compared to 13.1 per cent for the S&P 500 and 18.2 per cent for the Nasdaq 100 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.