A Ratio-Based Analysis of the Best and Worst Healthcare Stocks

by: Efsinvestment

The healthcare sector has always been one of the most promising sectors, as new healthcare services are in high demand. Given the increasing demand for healthcare products, most healthcare companies have had excellent returns for shareholders. In the last decade, this sector has had higher returns than any other sector in the S&P. However, it is important to carefully select the best stocks to invest in the sector. Therefore, we analyzed all large-cap U.S.-based companies that are in the healthcare sector, based on their market capitalizations, dividend yields, current and forward P/E ratios, EPS Growth, PEGs, profit margins and Beta values. Here are the results:

Highest Market Capitalization: The biggest companies in our research list are all in the drug manufacturing business. Johnson & Johnson (JNJ) is the largest company with a current market cap of $164.47 billion, followed by Pfizer (PFE) ($163.74 billion) and Merck & Co. Inc. (MRK) ($104.39 billion).

Lowest Market Capitalization: Mylan (MYL) has a market capitalization of $10.14 billion, followed by Boston Scientific (BSX) ($10.89 billion) and Zimmer Holdings (ZMH) ($11.57 billion).

The Best

Best Dividend Yield: Eli Lilly (LLY) has the best dividend yield of 5.48%, followed by Bristol-Myers (BMY) (4.78%) and Merck & Co. Inc. (MRK) (4.49%).

Lowest P/E Ratio: Two of the lowest current P/E ratios belong to companies in the health plans industry. Eli Lilly (LLY) has the lowest P/E ratio of 7.79, followed by Aetna (AET) and CIGNA (CI), each of which have P/E ratios of 9.06 and 9.07, respectively. Lowest P/E ratios indicate safe and high returns to value investors.

Lowest PEG: PEG is based on analyst predictions about future profits, unlike the P/E ratio. Aetna (AET) has the lowest PEG of 0.81, followed by Gilead Sciences (GILD) (0.83) and WellPoint (WLP) (0.94). Low PEG values may imply undervalued stocks.

Lowest Forward P/E Ratio: CIGNA (CI) has the lowest forward P/E ratio of 8.51, followed by Merck & Co. (MRK) (8.89) and Aetna (AET) (8.90).

Best EPS Growth in the Last Five Years: In our research, the companies that have the best EPS growth in the last five years are all biotechnology companies. Celgene (CELG) has the highest EPS growth rate of 60.29%. Celgene is followed by Biogen Idec (BIIB) and Gilead (GILD), each of which have EPS growth of 53.14% and 31.09% in the last five years, respectively.

Best Profit Margin: The average profit margin is 12.56% among the companies that are included in our analysis. The companies that have profit margins higher than 20% are as follows: Gilead (GILD) (36.35%), Amgen (AMGN) (30.74%), Intuitive Surgical (ISRG) (27.02%), Celgene (CELG) (24.28%), Bristol- Myers (BMY) (23.16%), Eli Lilly (LLY) (21.97%), Johnson & Johnson (JNJ) (21.65%) and Medtronic (MDT) (20.68%).

Lowest Beta: The average Beta of the stocks included in our research is 0.78. Abbott (ABT) has the lowest Beta of 0.29, which is followed by Genzyme (GENZ) (0.34) and Gilead (GILD) (0.41). A lower Beta generally means a safer return.

The Worst

Worst Dividend Yield: Amgen (AMGN), Biogen (BIIB), Boston Scientific (BSX), Celgene (CELG), Express Scripts (ESRX), Genzyme (GENZ), Gilead (GILD), HCA (HCA), Humana (HUM), Intuititive Surgical (ISRG), Mylan (MYL), Thermo Fisher (TMO), and Zimmer (ZMH) do not have any dividend policy. They did not pay any dividends last year. While it is normal for high-growth stocks not to pay dividends, a zero-dividend policy might signal pessimistic cash-flow expectations in the future for no-growth or low-growth companies.

Highest P/E Ratio: A P/E ratio higher than industry average may indicate an overvalued stock. Genzyme (GENZ) has the highest P/E ratio of 635.42, followed by Merck & Co. (MRK) (125.41) and Intuitive Surgical (ISRG) (38.47).

Highest PEG: Like a higher P/E ratio, an overvalued stock is indicated when there’s a higher PEG as well. Genzyme (GENZ) has the highest PEG of 24.62, followed by Merck & Co. (MRK) (24.30) and Pfizer (PFE) (9.52).

Highest Forward P/E Ratio: Intuitive Surgical (ISRG) has the highest forward P/E ratio of 28.03. ISRG is followed by Allergan (AGN) and Boston Scientific (BSX), each of which have forward P/E ratios of 18.18 and 15.5, respectively.

Worst EPS Growth in Last 5 years: Allergan (AGN) performed the worst (-73.55%) in the last five years, followed by Genzyme (GENZ) (-40.86%), and Merck & Co. (MRK) (-33.42%).

Worst Profit Margin: Although there are lots of very profitable companies in the healthcare sector, these companies have the lowest net profit margin: Boston Scientific (BSX) (-13.64%), Allergan (AGN) (0.10%), Genzyme (GENZ) (0.79%), Merck & Co. (MRK) (2.14%), Express Scripts (ESRX) (2.68%) and Humana (HUM) (3.25%).

Highest Beta: Even though the average Beta for the healthcare sector is quite low, these companies have Beta values higher than 1: Intuitive Surgical (ISRG) (1.55), CIGNA Corp. (CI) (1.52), Aetna (AET) (1.28), Boston Scientific (BSX) (1.15), Zimmer Holdings (ZMH) (1.08) and Humana (HUM) (1.06) have high Beta values.

The healthcare sector might offer unexpected opportunities for risk-taking investors. For risk-averse investors, some cash-rich healthcare titans pay fat dividends, thanks to their rich current account balances. If you are interested in safe returns with good dividends, check out the top 5 healthcare companies paying substantial dividends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.