6 Health Services Stocks Offering Growth At A Reasonable Price


The Health Services Sector is one of the smallest sectors as presented by FactSet as it only contains 137 companies out of more than 19,000 in the US and Canadian universe. Furthermore, since I was also screening for quality based on investment grade S&P Credit Ratings of BBB- or better, I was additionally surprised that only 11 companies met that benchmark. Additionally, since I was also screening for valuation, I only found 6 companies with P/E ratios below 17. There were a few well-known names (Anthem Inc., Humana Inc., and United Health Group Inc.) that missed the cut because their P/E ratios were moderately above 17, that otherwise could have also been featured.

Nevertheless, despite what was stated above, one characteristic that is shared by each of the research candidates on this list is an above-average rate of earnings growth. On the other hand, only 2 out of the 6 pay a dividend which suggests that this sector is most appropriate for investors interested in capital appreciation or growth. This growth orientation is also consistent with the fact that these best-of-breed companies in this sector have outperformed the S&P 500 over the long run despite the lack of dividend income.

Another characteristic that I found common, but not universal, with companies in the Health Services Sector was a penchant for the market providing premium valuations to their shares. However, ironically, these premium valuations were awarded to the non-dividend paying research candidates more so than the dividend paying ones. This seemed somewhat counter-intuitive to me since I would’ve expected dividend paying stocks in this sector to be more popular. On the other hand, the non-dividend paying research candidates have tended to experience significantly more severe price drops over recent market history. To me this suggests that their high valuations were more vulnerable when sentiment turned negative.

Regarding the two research candidates that do pay a dividend, I found it interesting that they both outperformed the S&P 500 on growth and on total dividend income. These results are clearly a function of above-average earnings growth that also translated into above-average dividend growth.

A Sector By Sector Review

This is part 10 of a series where I have conducted a simple screening looking for value over the overall market based on industry classifications and subindustry classifications reported by FactSet Research Systems, Inc.In part 1 found here I covered the Consumer Services Sector. In part 2 found here I covered the Communication Sector. In part 3 found here I covered the Consumer Durables Sector and its many diverse subsectors. In part 4 found here I covered Consumer Nondurables. In part 5 found here I covered companies in the Consumer Services Sector. In part 6 found here I covered the Distribution Services Sector. In part 7 found here I covered the Electronic Technology Sector. In part 8 found here I covered the Energy Minerals Sector. In part 9 found here I covered the Finance Sector.

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Disclosure:  Long CI at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to ...

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