The Vanguard Health Care Fund (Trades, Portfolio) released its third-quarter portfolio earlier this week.
The fund, which is managed by Jean Hynes, invests in a variety of health care-related stocks from around the world in order to achieve long-term capital appreciation. It picks stocks of companies that have high-quality balance sheets, strong management teams and the potential for new products that will generate consistently above-average revenue and earnings growth.
Keeping these criteria in mind, the fund entered only three new positions during the quarter: Laboratory Corp of America Holdings (LH, Financial), Zai Lab Ltd. (ZLAB, Financial) and Quidel Corp. (QDEL, Financial).
Laboratory Corp of America
After previously selling out of Laboratory Corp of America, which is more commonly known as LabCorp, in the first quarter of 2013, Vanguard entered a new 1.38 million-share stake. The holding was given 0.55% space in the equity portfolio. The stock traded for an average price of $184.13 per share during the quarter.
The Burlington, North Carolina-based company, which provides clinical laboratory testing services, has a $20.41 billion market cap; its shares were trading around $211.33 on Tuesday with a price-earnings ratio of 24.39, a price-book ratio of 2.5 and a price-sales ratio of 1.65.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 5 out of 10, however, indicates it is more fairly valued since the share price and price-sales ratio are approaching multiyear highs.
GuruFocus rated LabCorp's financial strength 5 out of 10. Although the company has adequate interest coverage, the Altman Z-Score of 2.78 indicates it is under some pressure since its assets are building up at a faster rate than revenue is growing.
The company's profitability fared better, scoring a 9 out of 10 rating. Despite the operating margin being in decline, it still outperforms a majority of competitors. LabCorp also has strong returns, a high Piotroski F-Score of 9, which indicates business conditions are healthy, and consistent earnings and revenue growth. It also has a predictability rank of five out of five stars. According to GuruFocus, companies with this rank typically return an average of 12.1% annually over a 10-year period.
With its purchase of 1.42% of LabCorp's outstanding shares, Vanguard is now the company's largest guru shareholder. John Rogers (Trades, Portfolio), Larry Robbins (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Wallace Weitz (Trades, Portfolio), Charles Brandes (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and several other gurus also have positions in the stock.
Zai Lab
The fund invested in 862,000 shares of Zai Lab, allocating 0.15% of the equity portfolio to the position. Shares traded for an average price of $80.26 each during the quarter.
The Chinese biopharmaceutical company, which develops treatments for cancer as well as infectious and autoimmune diseases, has a market cap of $915.01 million; its shares were trading around $82.06 on Tuesday with a price-book ratio of 13.13 and a price-sales ratio of 207.03.
According to the price chart, the stock is trading above its median price-book ratio as well as its median price-sales value.
Zai Lab's financial strength was rated 7 out of 10 by GuruFocus, driven by a high Altman Z-Score of 4.84 and high cash-to-debt ratio of 24.57.
The company's profitability did not fare nearly as well, scoring a 1 out of 10 rating on the back of negative margins and returns that underperform over half of its industry peers. Zai Lab's also has a moderate Piotroski F-Score of 5, which indicates operations are stable.
Of the gurus invested in Zai Lab, Ron Baron (Trades, Portfolio) has the largest stake with 2.73% of outstanding shares. Other guru shareholders are Ray Dalio (Trades, Portfolio), the Matthews Asia Small Companies Fund (Trades, Portfolio) and Cohen.
Quidel
The Health Care Fund picked up 286,797 shares of Quidel, dedicating 0.13% of the equity portfolio to the holding. During the quarter, the stock traded for an average per-share price of $222.17.
The manufacturer of diagnostic testing products, which is headquartered in San Diego, has a $10.78 billion market cap; its shares were trading around $256.75 on Tuesday with a price-earnings ratio of 30.09, a price-book ratio of 13.16 and a price-sales ratio of 11.12.
Based on the Peter Lynch chart, the stock appears to be overvalued. The GuruFocus valuation rank of 2 out of 10 aligns with this assessment.
Although assets are building up at a faster pace than revenue is growing, GuruFocus rated Quidel's financial strength 7 out of 10 on the back of comfortable interest coverage and a robust Altman Z-Score of 18.58.
The company's profitability scored a 6 out of 10 rating, driven by strong margins and returns that outperform a majority of competitors. Quidel also has a moderate Piotroski F-Score of 6 and a one-star predictability rank. GuruFocus says companies with this rank return, on average, 1.1% annually.
Mario Gabelli (Trades, Portfolio) is the company's largest guru shareholder with a 0.83% holding. Caxton Associates (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Pioneer also own the stock.
Additional trades and portfolio performance
During the quarter, Vanguard also boosted several positions, including Stryker Corp. (SYK, Financial), Terumo Corp. (TSE:4503, Financial), Baxter International Inc. (BAX, Financial), PPD Inc. (PPD, Financial) and Illumina Inc. (ILMN, Financial), among others.
The Health Care Fund's $47.35 billion equity portfolio is composed of 88 stocks. By industry, drug manufacturers make up the largest percentage of its holdings at 31.81%, followed by biotechnology at 19.46% and health care plans at 11.56%.
According to its website, the fund posted a 22.93% return for 2019, slightly outperforming its benchmark, the Spliced Health Care Index, which returned 22.67% for the year.
Disclosure: No positions.
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