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3 Undervalued Predictable Health Care Stocks To Put Under The Microscope

Summary

  • The health care sector has had the worst performance year to date.
  • In addition to DaVita, AMN Healthcare Services and HCA Healthcare qualified for the screener.

U.S. market indexes were all down the morning after Election Day, with the outcome of several key races still too close to call as Americans weigh their priorities on health care, education, border security and the state of the economy, among other concerns.

The Dow Jones Industrial Average slid 112 points on Wednesday morning, or about 0.3%, while the S&P 500 Index fell 0.3% and the tech-heavy Nasdaq Composite shed 0.6%.

While most sectors have posted poor performances so far this year on the back of rising interest rates and rampant inflation, the health care sector has been the worst performer, tumbling 52.12% year to date.

As a result, investors may be interested in finding opportunities among undervalued health care securities that have predictable performances.

The Undervalued Predictable Screener, a Premium GuruFocus feature, determines whether a stock is undervalued or overvalued based on two methods: discounted cash flow and discounted earnings.

According to both methods, companies with a discount higher than zero are consider undervalued, while discounts below zero are considered overvalued. The companies’ predictability rates are then determined based on their historical performance over the past decade.

The screener also looks for companies with predictability ranks of at least four out of five stars.

Based on these criteria, a number of tech stocks qualified for the screener as of Nov. 9, including DaVita Inc. (DVA, Financial), AMN Healthcare Services Inc. (AMN, Financial) and HCA Healthcare Inc. (HCA, Financial).

DaVita

Shares of DaVita (DVA, Financial) are currently trading 69% below the DCF value of $218 and 46% below the discounted earnings value of $123.

The Denver-based health care company, which provides kidney dialysis services through a network of outpatient centers, has a $6.06 billion market cap; its shares were trading around $67.22 on Wednesday with a price-earnings ratio of 9.85, a price-book ratio of 11.39 and a price-sales ratio of 0.57.

The GF Value Line suggests the stock, while undervalued, is a possible value trap currently based on historical ratios, past financial performance and analysts’ future earnings projections. As a result, potential investors should conduct thorough research before making a decision.

Further, the company’s GF Score of 89 out of 100 indicates it has good outperformance potential on the back of high points for profitability, growth and GF Value as well as middling marks for momentum. Financial strength, however, had a low rating.

GuruFocus rated DaVita’s financial strength 3 out of 10. As a result of the company issuing new long-term debt over the past three years, the interest coverage is insufficient. Further, the low Altman Z-Score of 1.33 warns the company could be at risk of bankruptcy. The return on invested capital, however, exceeds the weighted average cost of capital, meaning value is being created as the company grows.

The company’s profitability fared much better, scoring a 9 out of 10 rating due to strong margins and returns on equity, assets and capital that outperform a majority of competitors. DaVita also has a moderate Piotroski F-Score of 4 out of 9, which implies conditions are typical for a stable company, and consistent earnings and revenue growth that contributed to a four-star predictability rank. 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 DaVita, Warren Buffett (Trades, Portfolio) has the largest stake with 39.54% of its outstanding shares. Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also have positions in the stock.

AMN Healthcare Services

AMN Healthcare Services (AMN, Financial) shares are trading 67% below the DCF value of $373 and 52% below its discounted earnings value of $259.

The staffing company headquartered in Coppell, Texas, which provides hospitals and health care facilities with travel nurses and other temporary allied health professionals, has a market cap of $5.31 billion; its shares were trading around $122.58 on Wednesday with a price-earnings ratio of 14.81, a price-book ratio of 4.68 and a price-sales ratio of 1.03.

According to the GF Value Line, the stock is modestly undervalued currently.

The company also has a GF Score of 90, receiving high points for growth, profitability and GF Value, middling marks for financial strength and a low grade for momentum. As such, AMN Healthcare has high outperformance potential.

AMN Healthcare’s financial strength was rated 6 out of 10 by GuruFocus on the back of a comfortable level of interest coverage and a high Altman Z-Score of 4.91 that indicates it is in good standing despite assets building up at a faster rate than revenue is growing. The ROIC also overshadows the WACC, so value creation is occurring.

The company’s profitability scored a 9 out of 10 rating. Although the operating margin is declining, strong returns top a majority of industry peers. AMN Healthcare also has a high Piotroski F-Score of 7, meaning conditions are healthy, while steady earnings and revenue growth contributed to a 4.5-star predictability rank. GuruFocus found companies with this rank return, on average, 10.6% annually.

With 0.76% of its outstanding shares, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest position in AMN Healthcare. Other top guru investors are Ken Heebner (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Dalio’s firm, Greenblatt and Keeley-Teton Advisors, LLC (Trades, Portfolio).

HCA Healthcare

Shares of HCA Healthcare (HCA, Financial) are trading 34% below the DCF value of $322 and 53% below the discounted earnings value of $449.

The Nashville, Tennessee-based company, which owns and operates health care facilities across the U.S., has a $60.10 billion market cap; its shares were trading around $212.62 on Wednesday with a price-earnings ratio of 12.01 and a price-sales ratio of 1.07.

Based on the GF Value Line, the stock appears to be fairly valued currently.

The company has high outperformance potential on the back of a GF Score of 94. It recorded high points for profitability, growth and momentum as well as middling marks for GF Value and financial strength.

GuruFocus rated HCA Healthcare’s financial strength 4 out of 10. Although the company has issued new long-term debt in recent years, it is manageable due to adequate interest coverage. The Altman Z-Score of 2.47, however, indicates the company is under some pressure. The ROIC also eclipses the WACC, so value is being created.

The company’s profitability fared better with a 10 out of 10 rating. In addition to operating margin expansion, strong returns are outperforming a majority of competitors. HCA also has a high Piotroski F-Score of 7, while consistent earnings and revenue growth contributed to its five-star predictability rank. GuruFocus data shows companies with this rank return an average of 12.1% annually.

First Eagle Investment (Trades, Portfolio) is the largest guru shareholder of HCA with a 1.56% stake. The Vanguard Health Care Fund (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Bill Nygren (Trades, Portfolio) and Hotchkis & Wiley also have significant holdings.

Additional stock options

Other health care stocks that made the screener were Elevance Health
ANTM
Inc. (ELV, Financial), UnitedHealth Group
UNH
Inc. (UNH, Financial) and Edwards Lifesciences
EW
Corp. (EW, Financial).

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.