What are we looking for?
U.S.-listed health care stocks with strong earnings and low debt.
The U.S. health care industry has been in an upward trend over the past month. Among ETFs in the sector, the Health Care Select Sector SPDR Fund ETF (XLV) has shown strong performance, with a gain of 6.14 per cent. Following closely behind is the Communication Services Select Sector SPDR Fund (XLC), which has seen a 5.25-per-cent increase, and the Real Estate Select Sector Fund, with a return of approximately 4.46 per cent. This week, our analyst team conducted a thorough analysis in order to identify any exceptional cases within the sector based on fundamental factors.
The screen
We used Trading Central Strategy Builder, and started our screen with a minimum market capitalization threshold of US$10-billion to focus on larger, more established companies.
Our next step involved screening for companies with an operating margin of 10 per cent or higher. This criterion was used to identify health care stocks that generate substantial profits relative to their revenue.
Furthermore, we prioritized companies with a proven track record of earnings growth. For this purpose, we required a minimum five-year EPS growth rate of 10 per cent or higher.
Last, we screened for stocks with a debt-to-equity ratio no higher than 1. In the health care sector, a debt-to-equity ratio below 1 indicates financial stability, lower risk, increased flexibility, and a conservative capital structure. These factors contribute to investor confidence and long-term financial health.
Additionally, we have included year-to-date performance, P/E ratio, 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, and alpha-1 antitrypsin deficiency, and earlier-stage programs in diseases such as muscular dystrophies.
The company has one of the lowest debt-to-equity ratios on our list at just 0.05 because of a line of credit used for general purposes. The company has the highest operating margin on our list at 45.67, and the second-highest five-year historical EPS growth rate at 65.26 per cent. Looking at price performance, the stock has the highest one-year and YTD price return on our list at 45 and 4.1 per cent, respectively, and is trading at a record high at the time of this writing.
Merck & Co. MRK-N, a global health care company that offers prescription medicines – including biological therapies, vaccines and animal health products – has the highest market cap on our list at US$301.19-billion. The company has the third-highest five-year historical EPS growth on our list at 45.69 per cent.
Abbott Laboratories ABT-N, another global health care company, has a portfolio of technologies in diagnostics, medical devices, nutritional and prescription medicines, has the highest five-year historical EPS growth on our list at an impressive 70.67 per cent. The stock price has rebounded approximately 26 per cent from its 52-week low on Oct 9.
Trading Central Strategy Builder offers a back-testing function to assess the effectiveness of an investment strategy in the past. By utilizing a five-year historical period and quarterly rebalancing, the described approach yielded an annualized return of 17 per cent, outperforming the S&P 500 index’s 13 per cent.
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.
Gary Christie is head of North American research at Trading Central in Ottawa.