3 Rallying Healthcare Stocks With Strong Sources Of Profitability

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Includes: ISRG, PRGO, THOR
by: Kapitall

A company’s profitability can come from more than one source, and some are preferred over others. This is why an analysis beyond the top and bottom-line numbers is important when choosing stocks.

One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.

ROE can be broken up into three components such that increases in ROE can be attributed to those components.

ROE

= (Net Profit/Equity)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with,

  • Decreasing leverage, i.e. decreasing Asset/Equity ratio
  • Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

To illustrate this analysis, we ran DuPont on stocks from the healthcare sector that are rallying above their 20-day, 50-day, and 200-day moving averages.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

Do you think these companies have strong profitability? Use this list as a starting-off point for your own analysis.

List sorted by market cap.

1. Intuitive Surgical, Inc. (NASDAQ:ISRG): Medical Appliances & Equipment Industry. Market cap of $14.69B. The stock is currently trading at 7.80% above its 20-Day SMA, 3.28% above its 50-Day SMA, and 14.08% above its 200-Day SMA. MRQ Net Profit Margin increased to 27.58% from 25.29% year-over-year, Sales/Assets increased to 0.1606 from 0.1563, while Assets/Equity decreased to 1.16 from 1.17. The stock has had a couple of great days, gaining 16.93% over the last week.

2. Perrigo Co. (NASDAQ:PRGO): Drug Related Products Industry. Market cap of $8.69B. The stock is currently trading at 7.23% above its 20-Day SMA, 5.28% above its 50-Day SMA, and 19.02% above its 200-Day SMA. MRQ Net Profit Margin increased to 12.14% from 7.90% year-over-year, Sales/Assets increased to 0.22 from 0.20, while Assets/Equity decreased to 2.09 from 2.85. The stock has had a couple of great days, gaining 8.27% over the last week.

3. Thoratec Corp. (NASDAQ:THOR): Medical Instruments & Supplies Industry. Market cap of $2.02B. The stock is currently trading at 6.19% above its 20-Day SMA, 2.31% above its 50-Day SMA, and 13.91% above its 200-Day SMA. MRQ Net Profit Margin increased to 19.58% from 16.78% year-over-year, Sales/Assets increased to 0.17 from 0.12, while Assets/Equity decreased to 1.10 from 1.38. The stock has had a couple of great days, gaining 9.34% over the last week.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

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