Health care stocks took a hit last week after President Donald Trump signed an executive order calling for more transparency in disclosing hospital costs to patients.
As a result, value 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 29.2% annual return 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 July 3 were Biogen Inc. (BIIB, Financial) and HCA Healthcare Inc. (HCA, Financial).
Biogen
The Cambridge, Massachusetts-based biotechnology company, which specializes in developing therapies for treating neurodegenerative, hematologic and autoimmune diseases, has a $45.83 billion market cap; its shares were trading around $236.37 on Wednesday with a price-earnings ratio of 10.18, a price-book ratio of 3.36 and a price-sales ratio of 3.45.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
GuruFocus rated Biogen’s financial strength 7 out of 10. In addition to comfortable interest coverage, the company’s Altman Z-Score of 4.66 indicates it is in good fiscal health.
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 business predictability rank of five out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 12.1% over a 10-year period.
Of the gurus invested in Biogen, PRIMECAP Management (Trades, Portfolio) has the largest stake with 7.52% of outstanding shares. Other major guru shareholders include the Vanguard Health Care Fund (Trades, Portfolio), Jim Simons' (Trades, Portfolio) Renaissance Technologies, the Parnassus Endeavor Fund (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Hotchkis & Wiley, Joel Greenblatt (Trades, Portfolio), Richard Snow (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and the Eaton Vance Worldwide Health Sciences Fund (Trades, Portfolio).
HCA Healthcare
The hospital owner and operator, which is headquartered in Nashville, Tennessee, has a market cap of $46.33 billion; its shares were trading around $137.65 on Wednesday with a price-earnings ratio of 13.04 and a price-sales ratio of 1.01.
According to the Peter Lynch chart, the stock is undervalued.
Weighed down by approximately $3.8 billion in new long-term debt and poor interest coverage, HCA Healthcare’s financial strength was rated 4 out of 10 by GuruFocus. The Altman Z-Score of 2.13 also suggests the company is under some fiscal stress.
The company’s profitability and growth fared much better, scoring an 8 out of 10 rating. In addition to strong margins and returns that outperform over half of its industry peers, HCA is supported by steady earnings and revenue growth as well as a high Piotroski F-Score of 7, which indicates operating conditions are healthy. It also has a 2.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 7.3% per year.
With 1.56% of outstanding shares, Vanguard is the company’s largest guru shareholder. Other top guru investors include Larry Robbins (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Pioneer, Simons’ firm, Charles Brandes (Trades, Portfolio), Greenblatt, Steven Cohen (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), John Hussman (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Ron Baron (Trades, Portfolio).
Disclosure: No positions.
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