As the Covid-19 vaccines from Pfizer (PFE, Financial), BioNTech (BNTX, Financial) and Moderna (MRNA, Financial) continue to be distributed throughout the U.S. and internationally to doctors, nurses, the elderly and other vulnerable populations, investors are looking to the health care industry to find value.
Even though the vaccine rollout has been slower than anticipated, drugstore chain CVS Health Corp. (CVS, Financial) reported on Wednesday that it is on track to complete the first round of vaccinations at nursing homes across the country by Jan. 25. The Trump administration partnered with CVS, Walgreens Boots Alliance Inc. (WBA, Financial) and other retail pharmacies in order to treat residents and staff at long-term care facilities, with plans for broader distribution in the coming weeks.
As a result, potential investment opportunities may be found among companies in the health care industry that are trading below Peter Lynch value.
Lynch, a renowned investor who generated an average annual return of 29.2% while running Fidelity's Magellan Fund, developed this method in order to simplify his stock-picking process. With the belief that good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. The GuruFocus All-in-One Screener, a Premium feature, also looked for companies with a business predictability rank of at least two stars and revenue growth of at least 6% over the past decade.
The screener found companies that met these criteria as of Jan. 6 were Biogen Inc. (BIIB, Financial), CVS Health, Humana Inc. (HUM, Financial) and Universal Health Services Inc. (UHS, Financial).
Biogen
The Cambridge, Massachusetts-based biotechnology company, which specializes in developing therapies for treating neurodegenerative, hematologic and autoimmune diseases, has a $37.69 billion market cap; its shares were trading around $246.92 on Wednesday with a price-earnings ratio of 8.12, a price-book ratio of 3.5 and a price-sales ratio of 2.88.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued. The GuruFocus valuation rank of 10 out of 10 also supports this assessment since the share price and price ratios are all approaching multiyear lows.
GuruFocus rated Biogen's financial strength 6 out of 10. In addition to comfortable interest coverage, the company's high Altman Z-Score of 4.66 indicates it is in good standing. Additionally, the company is creating good value as its return on invested capital far exceeds its weighted average cost of capital.
The company's profitability and growth scored a 9 out of 10 rating, driven by operating margin expansion, strong returns that outperform a majority of competitors, consistent earnings and revenue growth and a moderate Piotroski F-Score of 6, which implies business conditions are stable. Biogen also has a predictability rank of 4.5 out of five stars. According to GuruFocus, companies with this rank return an average of 10.6% annually over a 10-year period.
Of the gurus invested in Biogen, PRIMECAP Management (Trades, Portfolio) has the largest stake with 10.32% of outstanding shares. Other major guru shareholders include the Vanguard Health Care Fund (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Warren Buffett (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Hotchkis & Wiley, Steven Cohen (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio).
CVS Health
Headquartered in Woonsocket, Rhode Island, the company, which owns a well-known drugstore chain as well as a pharmacy benefits manager and health insurance provider Aetna, has a market cap of $94.65 billion; its shares were trading around $72.39 on Wednesday with a price-earnings ratio of 11.97, a price-book ratio of 1.39 and a price-sales ratio of 0.36.
According to the Peter Lynch chart, the stock is undervalued. The GuruFocus valuation rank of 10 out of 10 also aligns with this analysis even though the share price is closing in on a two-year high.
CVS Health's financial strength was rated 5 out of 10 by GuruFocus. As a result of issuing approximately $31.5 billion in new long-term debt over the past three years, the company has insufficient interest coverage. The Altman Z-Score of 1.96 also indicates it is under some pressure since assets are building up at a faster rate than revenue is growing and revenue per share had recorded slowing growth over the past 12 months.
The company's profitability fared a bit better, scoring a 7 out of 10 rating. In addition to declining margins, CVS has returns that underperform over half of its industry peers. It is supported, however, by a high Piotroski F-Score of 7, which indicates operating conditions are healthy, and a 2.5-star predictability rank. GuruFocus says companies with this rank return an average of 7.3% annually.
With a 1.21% stake, Dodge & Cox is CVS Health's largest guru shareholder. Barrow, Hanley, Mewhinney & Strauss, PRIMECAP, the T Rowe Price Equity Income Fund (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Pioneer, Simons' firm and Richard Pzena (Trades, Portfolio) also have large positions in the stock.
Humana
The Louisville, Kentucky-based health insurance company has a $56.12 billion market cap; its shares were trading around $425.69 on Wednesday with a price-earnings ratio of 13.58, a price-book ratio of 3.56 and a price-sales ratio of 0.76.
Based on the Peter Lynch chart, the stock appears to be undervalued. The GuruFocus valuation rank of 4 out of 10, however, leans more toward overvaluation since the share price and price-sales ratio are both approaching multiyear highs.
GuruFocus rated Humana's financial strength 6 out of 10. Although the company has issued approximately $2.9 billion in new long-term debt over the past three years, it is at a manageable level due to having a comfortable level of interest coverage. The ROIC also eclipses the WACC by a wide margin, indicating good value creation.
The company's profitability scored an 8 out of 10 rating on the back of margins and returns that outperform over half of its competitors, a high Piotroski F-Score of 9 and steady earnings and revenue growth. Humana also has a 4.5-star predictability rank.
Steve Mandel (Trades, Portfolio) is the company's largest guru shareholder with a 1.64% stake. Other top guru investors include Vanguard, Simons' firm, Spiros Segalas (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Nygren and Pioneer.
Universal Health Services
Headquartered in Pennsylvania, the company, which provides hospital and health care services, has a market cap of $11.97 billion; its shares were trading around $140.99 on Wednesday with a price-earnings ratio of 13.82, a price-book ratio of 2.01 and a price-sales ratio of 1.06.
The Peter Lynch chart suggests the stock is undervalued. The GuruFocus valuation rank of 9 out of 10 aligns with this assessment.
Boosted by adequate interest coverage, Universal Health Services' financial strength was rated 6 out of 10. The Altman Z-Score of 2.23, however, indicates the company is under some pressure even though it has recorded consistent earnings and revenue growth.
The company's profitability fared better with a score of 8 out of 10. Although the operating margin is in decline, it, along with Universal Health's returns, outperform a majority of its industry peers. It also has a moderate Piotroski F-Score of 6 and a four-star predictability rank. GuruFocus data shows companies with this rank return, on average, 9.8% annually.
With a 4.2% stake, Vanguard is the company's largest guru shareholder. First Eagle Investment (Trades, Portfolio), Larry Robbins (Trades, Portfolio), Cohen, Pioneer, Robert Olstein (Trades, Portfolio), Simons' firm, Greenblatt, Ray Dalio (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) also have positions in Universal Health Services.
Disclosure: No positions.
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