U.S. market indexes rose on Thursday morning as investors were encouraged by several key earnings reports and Treasury yields continued to climb.
The Dow Jones Industrial Average surged 308 points, or 1%, while the S&P 500 Index increased 0.7% and the Nasdaq Composite gained 0.9%.
In contrast, most individual sectors were down, with health care posting the biggest loss for the day as well as the year to date.
Due to these developments, investors may be interested in potential opportunities among health care companies that qualify for Benjamin Graham’s Lost Formula screen, a Premium GuruFocus feature.
Prior to his death in 1976, the renowned investor and author of "Security Analysis" and "The Intelligent Investor" developed a refined formula that screened for companies with a price-earnings ratio of less than 10 and an equity-to-asset ratio of at least 0.5. The formula got its name from the fact that he was unable to publish it before his passing; therefore, it was lost from public knowledge for a time. Since Graham also prioritized a minimum interest coverage of 5 with the companies he invested in, that element was included in the criteria as well.
A backtest of the strategy from 1926 to 1976 showed it would have outperformed the Dow benchmark by approximately twice as much.
The screener found new health care companies that met the criteria as of Oct. 20 were Laboratory Corp of America Holdings (LH, Financial) and Ironwood Pharmaceuticals Inc. (IRWD, Financial).
Laboratory Corp of America
Laboratory Corp or America (LH, Financial) has a $19.29 billion market cap; its shares were trading around $212.23 on Thursday with a price-earnings ratio of 10.21, a price-book ratio of 1.87, a price-sales ratio of 1.30 and an equity-to-asset ratio of 0.51.
More commonly known as Labcorp, the Burlington, North Carolina-based company provides clinical laboratory testing services for everything from routine blood and urine screens to more complex cancer and genetic testing.
The GF Value Line suggests the stock is modestly undervalued currently based on its historical ratios, past financial performance and analysts’ future earnings projections.
Further, the GF Score of 94 out of 100 indicates the company has high future outperformance potential. It received high ratings of 10 out of 10 for growth, a 9 for profitability and 7 for both GF Value and momentum. Financial strength recorded a rank of 6.
In addition to an adequate interest coverage ratio of 16.38, the high Altman Z-Score of 3.23 indicates the company is in good standing. Further, the return on invested capital eclipses the weighted average cost of capital, meaning value is being created as the company grows.
Labcorp’s operating margin is expanding and it has strong returns on equity, assets and capital that top a majority of competitors. It is also supported by a moderate Piotroski F-Score of 5 out of 9, indicating conditions are typical of a stable company. Due to a slowdown in revenue per share growth over the past year, the predictability rank of four out of five stars is on watch. According to GuruFocus research, companies with this rank return an average of 9.8% annually over a 10-year period.
Of the gurus invested in Labcorp, the Vanguard Health Care Fund (Trades, Portfolio) has the largest stake with 1.64% of its outstanding shares. Jana Partners (Trades, Portfolio), John Rogers (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Wallace Weitz (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, Jeremy Grantham (Trades, Portfolio) and several other gurus also own the stock.
Ironwood Pharmaceuticals
Ironwood Pharmaceuticals (IRWD, Financial) has a market cap of $1.54 billion; its shares were trading around $10.04 on Thursday with a price-earnings ratio of 9.93, a price-book ratio of 2.88, a price-sales ratio of 4.22 and an equity-to-asset ratio of 0.55.
The pharmaceutical company, which is headquartered in Boston, develops therapies to treat gastrointestinal diseases like irritable bowel syndrome and gastroesophageal reflux disease.
According to the GF Value Line, the stock is fairly valued currently.
The GF Score of 69 implies the company has poor future performance potential. It recorded a 6 out of 10 rating for financial strength, ranks of 5 for GF Value and momentum and 4 for profitability and growth.
Despite having a sufficient interest coverage ratio of 11.7, the Altman Z-Score of 2.9 implies the company is under some pressure as it has recorded a decline in revenue per share over the past 12 months. The ROIC exceeds the WACC, however, so value creation is occurring.
Ironwood Pharmaceuticals is being supported by strong margins and returns that are outperforming versus industry peers. The company also has a moderate Piotroski F-Score of 6 and a one-star predictability rank. GuruFocus found companies with this rank return, on average, 1.1% annually.
With a 7.09% stake, the Vanguard Health Care Fund (Trades, Portfolio) is Ironwood Pharmaceuticals’ largest guru shareholder. Other guru shareholders include Simons’ firm, Chuck Royce (Trades, Portfolio), Michael Price (Trades, Portfolio), John Hussman (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
