As a volatile 2018 comes to a close, the major stock market indexes are expected to post their worst annual performances since 2008. The Dow Jones and S&P 500 have tumbled more than 6% year to date, while the Nasdaq Composite has fallen over 4%.
The S&P 500 Health Care Index, however, has outperformed the major indexes this year with a return of roughly 3.78%. As a result, health care stocks trading below Peter Lynch value may be good investments for 2019.
A renowned value investor, Lynch developed this method as a means of simplifying his stock-picking process. With the belief 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 good investments since their share prices are likely to appreciate over time, creating value for shareholders. The screener also looked for companies with a business predictability rank of at least two stars and a 10-year revenue growth rate of at least 6%.
According to the GuruFocus All-in-One Screener, health care companies in the S&P 500 that met these criteria as of Dec. 31 were AmerisourceBergen Corp. (ABC, Financial), Laboratory Corp of America Holdings (LH, Financial) and Zimmer Biomet Holdings Inc. (ZBH, Financial).
AmerisourceBergen
The Chesterbrook, Pennsylvania-based medical distribution company has a market cap of $15.64 billion; its shares were trading around $73.81 on Monday with a price-earnings ratio of 9.81, a price-book ratio of 5.44 and a price-sales ratio of 0.10.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
AmerisourceBergen’s financial strength and profitability and growth were both rated 7 out of 10 by GuruFocus. In addition to having adequate interest coverage, the Altman Z-Score of 4.92 indicates it is in good fiscal standing. Although the company’s margins underperform competitors, the Piotroski F-Score of 6 implies business operations are stable.
Supported by consistent earnings and revenue growth, AmerisourceBergen also has a business predictability rank of four out of five stars. GuruFocus says companies with this rank typically see their stock prices gain an average of 9.8% per year.
Of the gurus invested in AmerisourceBergen, Seth Klarman (Trades, Portfolio) has the largest stake with 1.3% of outstanding shares. Larry Robbins (Trades, Portfolio), Smead Capital Management, Inc. (Trades, Portfolio), Arnold Van Den Berg (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) are also shareholders.
Laboratory Corp of America
Headquartered in Burlington, North Carolina, the medical diagnostics and research company has a $12.65 billion market cap; its shares were trading around $125.37 on Monday with a price-earnings ratio of 8.92, a price-book ratio of 1.76 and a price-sales ratio of 1.14.
According to the Peter Lynch chart, the stock is undervalued.
GuruFocus rated LabCorp’s financial strength 6 out of 10. Despite having sufficient interest coverage, the Altman Z-Score of 2.48 suggests the company is under some fiscal pressure.
The company’s profitability and growth scored an 8 out of 10 rating. Although the margins are in decline, they still outperform industry peers. In addition, LabCorp has good earnings and revenue growth, a stable Piotroski F-Score of 6 and a perfect business predictability rank of five stars. According to GuruFocus, companies with this coveted rank typically see their stock prices gain an average of 12.1% per year.
With 2.25% of outstanding shares, Pioneer is the company’s largest guru shareholder. Other gurus with positions in the stock include John Rogers (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Wallace Weitz (Trades, Portfolio), Greenblatt, Robbins, Fisher, Charles Brandes (Trades, Portfolio), Richard Snow (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio) and several others.
Zimmer Biomet
The medical devices manufacturer, which is based in Warsaw, Indiana, has a market cap of $21.2 billion; its shares were trading around $103.91 on Monday with a price-earnings ratio of 12.09, a price-book ratio of 1.73 and a price-sales ratio of 2.67.
Based on the Peter Lynch chart, the stock appears to be undervalued.
Zimmer Biomet’s financial strength was rated 5 out of 10 by GuruFocus. Weighed down by poor interest coverage, the Altman Z-Score of 2.04 suggests the company is under some minor fiscal stress.
The company’s profitability and growth scored a 9 out of 10 rating. Although the operating margin is in decline, it still outperforms 71% of competitors. In addition, Zimmer Biomet is supported by a high Piotroski F-Score of 7, which means business conditions are healthy. The company also has a three-star business predictability rank, which is on watch as a result of a slowdown in revenue per share growth over the last 12 months. According to GuruFocus, companies with this rank typically see their stock prices gain an average of 8.2% per year.
The Vanguard Health Care Fund (Trades, Portfolio) and Jana Partners (Trades, Portfolio) are the company’s largest guru shareholders with 1.2% of outstanding shares. Other top investors include PRIMECAP Management (Trades, Portfolio), Hotchkis & Wiley, Sarah Ketterer (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Rogers, Steven Cohen (Trades, Portfolio), Snow and Gabelli.
Disclosure: No positions.
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