Despite Market Run, Values Still Plentiful in Healthcare, Financials, Telecom

By Chad Brand

Although I am not an aggressive buyer of stocks in general nowadays (the U.S. market has rarely been this overbought in the short term), that does not mean bargains do not exist. After analyzing dozens of third quarter earnings reports so far and listening to company conference calls this month, it is clear that certain sectors still have negative sentiment despite relatively strong cash flows. In an overextended market, those areas can still be a focus for investors on the long side.

Healthcare, Financials, and Telecommunications are three sectors in which I still favor searching for bargains. Fears over Healthcare reform are clearly overblown. Whatever final bill passes the Senate and is signed by President Obama is quite likely to increase the number of Americans enrolled in the health insurance market, which in turn means more people being covered and having access to doctors and medications. Given the current outline of the legislation, it is hard to see how the health insurers and the drug companies will be meaningfully hurt by this reform. If anything, the demand for their products and services will get a bump. And yet, investors can still buy leading firms in these two industries for single digit forward P/E multiples.

Although many bank stocks have led the market rally since early March, there are still many banks that are profitable and only trading at or slightly above book value. Since banks typically trade for 2-3 times book value and 10-12 earnings during a normalized economic environment, there appears to be upside of between 50 and 100 percent for many of these names. This assumes two things; investors believe the economy will get back to normal over the next few years, and they are willing to have an investing time horizon of at least that long. Larger banks with strong brands and profits expected in 2009 should give investors little pause for concern.

Lastly, the Telecommunications sector is boring, but low valuations (3-6 times cash flow) and high dividend yields make them attractive for value investors. The market for cell phone service in the U.S. is surely going to slowly increase as population growth continues and there are really only a handful of market leaders that will share that pie for decades to come. The sector is quite resistant to weak economic conditions, so an economic recovery is not even a prerequisite for investing in these firms.

All in all, there are fewer values to be found but investors can still pay inexpensive prices for leading U.S. companies even after a 65% market ramp up. I am not being aggressive in the U.S. stock market right now, but these types of stocks are far from aggressive and look attractive

Comments

[socrateaz:]

Interesting: I think healthcare. Especially insurance is very vulnerable to changes that may come in the future. The fact a company can not dump bottomless pit patients will hurt the bottom line. But on the positive side. Not having to investigate possible insured will cut cost up front. An overall 3% margin could be wiped out by very small price controls proposed by Obama. I think the insurance worries are not conducive to an upward moving value. You may see value there! I see a chance at one roll of a roullette wheel verses total losses if it does not work. People know the bank side is full of values that are inconsistent. The numbers look good. It is very subjective as to the value of anything banks deal with. Good luck on your investments!

Oct 28 09:44 AM