Looking for future winners among the universe of healthcare stocks, I searched for stocks with above average growth prospect. Those stocks would have to show stable financial conditions and generate significant free cash flow. However, in order to find the proper moment for an opening position, a technical analysis with a momentum indicator can be of great assistance for investors.
I have elaborated a screening method, which shows stock candidates following these lines. Nonetheless, the screening method should only serve as a base for further research.
The screen's formula, that will be called HC-11, requires all stocks to comply with all following demands:
- The stock is included in the Russell 3000 index. Russell Investment explanation: "The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected."
- The stock is in the healthcare sector.
- Earnings growth estimates next 5 years (per annum) is greater than 11%.
- Price to free cash flow is less than 15.
- Total debt to equity is less than 0.6.
- 10-day moving average is over 20-day moving average, and the cross happened 4 days or less prior to the start of the screen (Short term momentum indicator).
I used Portfolio123's powerful free screener to perform the search. After running this screen on September 1, 2012, I obtained as results the following three stocks:
Click to enlarge
Omnicare Inc. (OCR)
Omnicare has relatively low debt and its price to free cash flow for the trailing 12 months is only 9.7. The average annual earnings growth estimates for the next five years is 11.2%, and there were insiders buying last month, all these turns the stock to be quite attractive.
Business description from Yahoo Finance: "Omnicare, Inc. operates as a healthcare services company that specializes in the management of pharmaceutical care in the United States and Canada. It provides pharmaceuticals, and related pharmacy and ancillary services to long-term care facilities, as well as chronic care facilities and other settings. Omnicare, Inc. was founded in 1981 and is headquartered in Cincinnati, Ohio."
Obagi Medical Products, Inc. (OMPI)
Obagi Medical has almost no debt at all, and its price to free cash flow for the trailing 12 months is only 14.1. The average annual earnings growth estimates for the next five years is 11.5%, all these turns the stock to be quite attractive.
Business description from Yahoo Finance: "Obagi Medical Products, Inc., a specialty pharmaceutical company, develops, markets, and sells topical aesthetic and therapeutic prescription skin care systems. It offers Obagi Nu-Derm System, including prescription and OTC drugs that are used for the treatment of fine lines, wrinkles, acne, photo damage, hyperpigmentation, melasma, laxity, and skin sallowness. The company was founded in 1988 and is headquartered in Long Beach, California."
Thoratec Corp. (THOR)
Thoratec has no debt at all and its price to free cash flow for the trailing 12 months is only 14.2. The average annual earnings growth for the last five years was 74%, and its annual earnings growth estimates for the next five years is 12.9%.
Business description from Yahoo Finance: "Thoratec Corporation engages in the development, manufacture, and marketing of proprietary medical devices used for circulatory support. The company's primary product lines include ventricular assist devices, such as HeartMate II, an implantable left ventricular assist device consisting of a rotary blood pump to provide intermediate and long-term mechanical circulatory support (MCS); and HeartMate XVE, an implantable and pulsatile left ventricular assist device for intermediate and longer-term MCS.Thoratec Corporation was founded in 1976 and is headquartered in Pleasanton, California."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.