As the Bull market continues to hang on, investors must be more selective and conservative with their selections. The market continues to look toppy and certainly overbought. However, that does not mean there will necessarily be a free fall in the days to come. More likely, we will see more pullbacks followed by shallow rallies. Since the automatic budget cuts have become a reality, expect the market to react very negatively as it will carve a significant chunk out of government spending in the hopes of containing the runaway deficit. That is why I am talking about a conservative stock, Omnicare Inc. (NYSE: OCR).
Omnicare is a healthcare services provider that essentially operates as a drug wholesaler to long term care homes and other specialized care centers. Additionally, they offer a variety of other consulting services as to the right pharmaceutical drug that is needed. Simply put, Omnicare is in the forefront of providing pharmaceutical care to assisted living homes, independent living communities, hospitals and correctional settings. This is a conservative play because Omnicare is a leader in the industry that needs cheap, reliable pharmaceutical care. Even if the economy tanks, people that rely on certain meds will continue to purchase the meds.
The company's recent fourth quarter earnings release shows just that. Omnicare reported earnings of $0.86 per share on revenue of $1.53 billion. Analysts were looking for earnings of $0.85 per share on revenue of $1.51 billion. While it was no blowout quarter by any means, the company beat estimates and earnings per share saw a jump of 48 percent from a year ago on non-GAAP earnings per share of $0.86. Margins increased nicely except operating margin, which saw only a decrease of 60 basis points. However, gross margin came in at 24.6 percent or 150 basis points higher and net margin came in at 3.9 percent or 190 basis points higher.
Fundamentally, the stock looks to be in great health. Currently, the company has a price to earnings of 25 and forward price to earnings of 10. PEG comes in at an overvalued 2.16 but price to sales is an undervalued 0.64. Price to free cash flow is a healthy 10.24 and the company shows excellent financial health with a current ratio of 4.82. Total debt to equity comes in at 0.55, while the company has $6.19 cash per share on its books. Additionally, the company pays out a 1.5 percent dividend. More impressively, analysts are expecting earnings to rise 1039.7 percent this year, 7.87 percent next year and 12 percent the next five years.
While Omnicare is a great long term play, the stock hit technical resistance at $40 and has been in decline since. However, support registers around $36.50 so keep an eye on that level to hold as a good entry point. Other than that, the stock looks ripe for long term gains and this rare pullback could prove to be lucrative should you enter the trade.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.