What are we looking for?
U.S. health care stocks that are benefiting from a sector rotation.
Upside momentum seems to be entering the U.S. health care sector as it takes top spot over the past five trading days, followed by the energy and utilities sectors. The S&P 500 Healthcare Sector SPDR (XLV-A) fund ETF has gained approximately 4 per cent over the past week. Health care providers and pharmaceutical stocks are pushing the sector higher. Trading Central’s analyst desk in Ottawa dug deeper into the sector and built a strategy that outperforms the broad market if the health care sector continues to outperform.
The screen
We used Trading Central Strategy Builder to search for U.S. health care stocks with good valuations from a Quantamental perspective, which uses artificial intelligence and machine learning to rate stocks in the sector, price performance and a history of positive earnings growth.
We began by setting a minimum market capitalization threshold of US$10-billion to focus on larger, more established companies in the market.
Next, we screened for companies that are indicating an operating margin that is 10 per cent or higher in order to find profitable companies earning the most per dollar of revenue.
We like companies with a proven track record of earnings growth. Five-year EPS growth must be at least 10 per cent or higher.
Finally, we filtered for the top-rated stocks using Trading Central’s Quantamental rating method, which rates stocks on a scale of one to 10, with 10 being the most bullish and one being the most bearish. TC Quantamental rating uses a combination of valuation, growth, quality, price momentum and income as key metrics when rating a company. In our screen, we set a minimum rating of five out of 10 in order to screen for the top-rated companies.
We have also included year-to-date, P/E, dividend yield and one-year price performance for your reference.
More about Trading Central
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.
What we found
Topping our list is global biotech company Vertex Pharmaceuticals VRTX-Q. The company is focused on developing medicines that treat the underlying cause of cystic fibrosis. Its product pipeline includes mid- and late-stage clinical programs in sickle cell disease, beta thalassemia, acute and neuropathic pain, APOL1-mediated kidney disease, type 1 diabetes, alpha-1 antitrypsin deficiency and earlier-stage programs in diseases such as muscular dystrophies.
The stock has the highest five-year EPS growth on our list at 65.26 per cent and the second-highest operating margin on our list at 48.9 per cent. The TC Quantamental rating is at 6.59, above the average of all the stocks that made our list. The stock price is within 1 per cent of its record high, which is key price resistance at the US$325 price level. A break above US$325 could be a signal of a continuation of the prior uptrend that had been in place since November, 2021.
Merck & Co. Inc. MRK-N is a global health care company that offers health solutions through its prescription medicines, including biological therapies, vaccines and animal health products. It operates through two segments: pharmaceutical and animal health. The stock has the largest market cap on our list at US$284-billion. The stock has returned approximately 31.7 per cent over one year, the second-highest one-year return on our list, as it trades within 3 per cent of its record high. Operating margin and five-year EPS growth are at 30.8 and 45.69 per cent respectively.
Trading Central 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 12-per-cent annualized return, compared with 10 per cent for the S & P 500 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central with respect to the investment in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.