Credit: Shutterstock photoBy David Floyd for Kapitall
The healthcare sector has been making a lot of money for investors recently-and earning a bad rap in the process. Following a market correction in October, healthcare stocks have taken off. The Vanguard Health Care ETF ( VHT ), for example, is leaving the S&P500 and the Dow Jones Industrial Average in the dust:
But all this success has brought the critics out of the woodwork, and talk of a healthcare-and especially a biotech-bubble is heard more and more frequently. To be fair to the naysayers, biotech companies share a disturbing tendency with their tech brethren to brush away concerns like making money and having viable products. Hence terms like "prerevenue" and, in the case of biotech companies that have not yet begun human trials, "preclinical." Keep in mind that only 3 percent of "preclinical" drugs make it to market.
So is there any room for growth in healthcare? One of our favorite metrics suggests there is. We screened for companies in the healthcare sector with high ratios oflevered free cash flow to enterprise value (LFCF/EV) . Levered free cash flow is the free cash flow available after a company has paid interest on debt. Enterprise value is a company's market capitalization plus its outstanding debt, minus its cash and long-term investments.
LFCF/EV is similar in principle to the price to earnings ratio (P/E), but more reflective of a company's balance sheet. Companies with high LFCF/EV ratios may be able to use that cash to invest in growing the company.
Wary investors who suspect that biotech is overheated might feel vindicated when they hear that only two biotech companies exceeded our 0.1 LFCF/EV threshold. In all, 13 healthcare stocks made the cut, so we narrowed it down further by screening for positive EPS growth over the next 5 years . This implies that analysts believe the company is poised to grow, and that its valuation isn't low just because it's unexciting.
Click on the interactive chart to view data over time.
1. Infinity Pharmaceuticals Inc. ( INFI , Earnings , Analysts , Financials ): Engages in the discovery and development of medicines for the treatment of cancer and other conditions in the United States. Market cap at $782.27M, most recent closing price at $16.04.
Levered free cash flow at $43.43M, enterprise value at $365.45M, implying an LFCF/EV ratio of 0.12.
EPS growth over the next five years at 3.00 percent.
2. DepoMed Inc. ( DEPO , Earnings , Analysts , Financials ): Develops and commercializes pharmaceutical products based on its proprietary oral drug delivery technologies in the United States. Market cap at $1.33B, most recent closing price at $22.60.
Levered free cash flow at $93.68M, enterprise value at $764.96M, implying an LFCF/EV ratio of 0.12.
EPS growth over the next five years at 30.00 percent.
3. Health Net Inc. ( HNT , Earnings , Analysts , Financials ): Provides managed health care services through its health plans and government-sponsored managed care plans. Market cap at $4.46B, most recent closing price at $57.24.
Levered free cash flow at $383.89M, enterprise value at $2.21B, implying an LFCF/EV ratio of 0.17.
EPS growth over the next five years at 20.81 percent.
4. Cigna Corp. ( CI , Earnings , Analysts , Financials ): Operates as a health service organization. Market cap at $32.13B, most recent closing price at $121.59.
Levered free cash flow at $4.75B, enterprise value at $33.25B, implying an LFCF/EV ratio of 0.14.
EPS growth over the next five years at 11.26 percent.
5. Alphatec Holdings Inc. ( ATEC , Earnings , Analysts , Financials ): Alphatec Holdings, Inc., through its wholly owned subsidiary, Alphatec Spine, Inc., engages in the design, development, manufacture, and marketing of products for the surgical treatment of spine disorders, primarily focused on the aging spine. Market cap at $132.60M, most recent closing price at $1.35.
Levered free cash flow at $20.34M, enterprise value at $188.99M, implying an LFCF/EV ratio of 0.11.
EPS growth over the next five years at 12.00 percent.
6. Providence Service Corp. ( PRSC , Earnings , Analysts , Financials ): Provides and manages government sponsored social services and non-emergency transportation services. Market cap at $729.72M, most recent closing price at $46.01.
Levered free cash flow at $79.85M, enterprise value at $682.50M, implying an LFCF/EV ratio of 0.12.
EPS growth over the next five years at 15.00 percent.
(List compiled by David Floyd. LFCF/EV ratios sourced from Yahoo! Finance. Monthly returns data sourced from Zacks Investment Research. All other data sourced from FINVIZ.)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
