The fate of U.S. healthcare reform remains uncertain. But despite the uncertainty, many believe the sector remains a compelling long-term play. Kim Parlee speaks with Peter Ashton, vice president at Recognia, who says there’s value to be found in this sector
Peter Ashton is Vice President at Recognia, a firm that specializes in quantitative and technical analysis, and says there is value to be found in this sector. Peter, thanks so much for joining us.
Thanks for having me, Kim.
Let me just start off-- if you could just paint us a picture, if you will. I mentioned at the top, obviously, a lot of things have been going on in the past year. But as of today, what are some of the trends you're watching in health care right now?
So in the US health care market, 2017 has really been about sort of two issues-- one political and one legal. So the political issue is the one you've identified, which is the repeal of the Affordable Care Act, also called Obamacare. Republicans promised to repeal it. And, in fact, they've tried twice and have not been successful. So that's cast a little bit of a shadow over the health care industry.
The second factor is really legal, and that relates to the opioid crisis in the US. So several different governors have already declared public health emergencies in their states. Different attorney generals are looking at potentially suing drug makers or drug distributors around what they knew about the opioid crisis and when. So that is also putting a little bit of a pallor over the sector.
So when you take a look at not just the sector but the stock performance of the sector, as well, what stands out for you?
Well, so 2017 has been a great year for the US markets. The S&P 500, the broader markets, advanced by about 21%. And there have been some sectors, like the industrials, consumer goods, technology, have all advanced more than 30%. By contrast, the health care sector has a bit of a laggard. So it's only up about 11%. It's the second lowest of all US sectors after utilities.
So in the light of a really overheated US market, there's certainly pockets of value in the health care sector to be found.
And where are the pockets of value in the pocket of the health care sector? What names look interesting to you right now?
So I can suggest a number. So the first one is McKesson. McKesson is a very large distributor and wholesaler of drugs in the US. They also have a big medical supplies business. McKesson is a huge company, $200 billion of annual revenue. And it's a company with a long-term track record of growing revenues and earnings. They have a 10-year EPS growth rate of 22% a year. And as a result of some of the factors we've talked about, the company is looking really, really fairly valued. It's only about 5% off its 52-week low and has a very low forward price-to-earnings ratio, about 11.6.
OK, and the next one I understand you like is Gilead.
Yeah, so Gilead Sciences was sort of a superstar of the pharmaceutical industry in the US for quite a while. Their growth was really fueled by drugs to treat hepatitis, particularly something called Harvoni. So about a month ago, the company actually announced third quarter results, which were above expectations both for revenue and earnings.
But the company did guide down a little bit in terms of revenue for one of their hepatitis drugs. And that really, sort of, shook the company stock. It sold off very significantly. But as a result, the stock is only up about 2% year-to-date. So potentially, here is an opportunity to get into what was previously a superstar of this industry and certainly has a very great prospect for the future at a much better price than you would have got just a few months ago.
Last name, I understand, you like in the US space is Johnson & Johnson. And I guess the interesting thing with them is they're a little more skewed towards the consumer side of things.
Exactly, so Johnson & Johnson is a very large pharmaceutical firm. They're in the health sector. But, of course, they also have a consumer goods part of their business, so band-aids, and baby powder, and Listerine, and so on are all part of their business. That's about 1/6 of their revenue. So although they're in the health care industry, they're kind of tarred by some of the same issues that other companies are feeling. There's a part of their business that's very, very stable and growing. That's the consumer goods sector.
Johnson & Johnson is also what we call a dividend aristocrat. So it's one of 51 companies in the US that's grown its dividend every year for the last 25 years. Oftentimes, these stocks are very, very expensive as a result of that denomination. Johnson & Johnson is certainly something people may want to look at who are seeking dividends.
What about-- I mean, how do you do that, though, with still all the uncertainty out there? You have these individual fundamental stories of what these companies are doing, which you just outlined, but you still are at the mercy of it in terms of the overall health care reform that could or could not happen.
Exactly, and it's hard to predict the future, but certainly we want to look at companies that are growing and making money. And these are the kind of companies that, in the long term, should do well. So looking for those kind of stocks that have maybe not participated as much in the overall market rally and may represent or may have prospects of better returns in the future.
What about Canada? Anything that pops up on your radar on the Canadian side of things?
Yeah, so two things. So you know, often-- the pharmaceutical industry in Canada is not nearly the size of the US, but there are a few things people follow. Often people think about the medical marijuana industry, for example, in Canada. None of those would be considered value stocks today. You know, they're certainly-- not many are profitable and certainly they're quite expensive.
The other company which people follow quite closely in Canada is Valeant. So here is a company which has got an interesting turnaround story. Two years ago, this company was trading at over $350 a share Canadian. It's currently trading just a little north of $19. So the turnaround seems to be underway. There's a new management team was installed in 2016. And they announced earnings about two weeks ago, which kind of blew it out in terms of both revenue and earnings. The stock is trading significantly higher.
I think for anybody who wanted to invest in Valeant, there's maybe a couple of things to think about. Number one is Wall Street doesn't love this company the way it did in 2015. So it's not followed by nearly as many analysts. There isn't nearly the same institutional ownership. But there does seem to be a turnaround story taking place. And I think that with some cautious investigation, it might be an interesting play.
Yeah, a lot of people, obviously, might be a little leery on that one, as well, too, if they had been some of the ones buying in at that $350 price for before. Peter, always a pleasure. Thanks so much.
Thanks very much.
My pleasure. Peter Ashton, he's Vice President of Recognia, and he joined us from Ottawa.