Health care stocks have been suffering from a malaise. They lagged the market for a long time, only to feel good again over the past year, before indigestion returned. During the past month, they have lagged the market, as the overall market bounced back.
My guru strategies have taken note by taking advantage of relatively lower prices. They have given high grades to a number of health care stocks. When one of these strategies gives a stock a high grade, it is worth writing about. This time, I am recommending two stocks that earned high-fives from two strategies, and the third stock received a high grade from one strategy. These strategies are automated analyses that mirror the strategies of some of history's most savvy investors, and they have proven their worth over the eight-plus years I have used them.
AstraZeneca (AZN) gets passing grades from two strategies. Formed in 1999, when Astra of Sweden and Zeneca Group of the United Kingdom joined forces, the company operates in over 100 countries, has more than 61,000 employees and spends more than $4 billion a year on research and development.
Peter Lynch, one of history's more storied mutual fund managers, has written about how he analyzes stocks in his book, One Up on Wall Street. Based on his writings, I created a strategy that suggests that AstraZeneca is worth investing in today. Its size is favorable with sales of nearly $34 billion, its earnings per share (EPS) is positive and the company has reasonable amount of debt.
The price/earnings to growth (P/E/G) ratio is the strategy's best-known variable, and it measures how much the investor is paying for growth. It needs to be 1.0 or lower, and south of 0.5 is even better. AstraZeneca is in this most desired territory by having a yield-adjusted P/E/G of 0.36.
Money manager and noted market analyst James P. O'Shaughnessy is also onboard with AstraZeneca. This strategy likes the company's market cap ($62 billion), positive cash flow per share, large number of shares outstanding (1.4 billion) and sizable annual sales. The final measurement used by this strategy is to take all of those stocks that pass the previous tests and pick the 50 that provide the highest dividend yield. AstraZeneca's yield of 5.70% places it in this coveted, top-50 category.
In the U.S., there are three major players in the pharmaceutical distribution space. AmerisourceBergen (ABC) is one of these and it gets a clean bill of health from both the Lynch and O'Shaughnessy strategies. The company reports that it handles about 20% of all the pharmaceuticals sold and distributed throughout the country.
The Lynch strategy likes AmerisourceBergen because of its positive cash flow, reasonable debt load and yield-adjusted P/E/G ratio of 0.75. That P/E/G is not as low as AstraZeneca's, but it is certainly more than adequate.
The O'Shaughnessy strategy comes in two flavors - the Cornerstone Growth Strategy and the Cornerstone Value Strategy. The Value Strategy reviewed AstraZeneca, while AmerisourceBergen was analyzed using the Growth Strategy (because it is a smaller company than AstraZeneca). As a result, the variables considered are different.
The Cornerstone Growth Strategy favors AmerisourceBergen because of its market cap ($11 billion), EPS, which has increased in each of the past five years, and modest price-sales ratio. It takes the companies that pass the previous tests and then picks the top 50 based on relative strength, which is a measure of how well a stock has performed vs. the rest of the market over the past year. With a relative strength of 85, AmerisourceBergen is in this top-50 grouping.
Novo Nordisk (NVO) gets a nod from only from the Lynch strategy, but don't let that dissuade you from investing in this company. This is a very strong pharmaceutical firm with excellent prospects. Headquartered in Denmark, Novo Nordisk holds about 50% of the world's insulin market, making it a giant in the diabetes arena. The company also has non-diabetes products as well.
The Lynch strategy likes the company's P/E/G ratio of 0.91, based on a P/E of 21.25 and a growth rate of 23.30%, which is the average of the three- four- and five-year historical EPS growth rates. In addition, debt is quite low and cash flow is positive.
Health care stocks are in the doldrums, yet their prospects are quite strong and their stock prices favorable. If you do not already own health care stocks, any of these would be strong additions to your portfolio.
