Green Shoots Of Grass

Finding Green Shoots Among My Healthcare Stocks

After taking a beating in 2016, it appears that the Healthcare Sector may be on the rebound. I have been taking advantage of the cheap prices by consistently adding to my positions over the last 6 months, with new positions and multiple buys made in Abbott Labs $ABT and CVS Health $CVS, along with adding to my positions in Omega Healthcare $OHI, and AbbVie Inc. $ABBV.

Here are the prices for those transactions, and how they have done so far.

Health Care Sector Investments

On the surface, those numbers don’t look all that great, as the first three purchases made are still underweight. I was a bit early in jumping in on CVS Health Corp., and my first two buys remain under water. However, I made a third purchase following the big drop on earnings, and that has worked out well so far, as that buy is up nearly 11%.

Despite the concerns about CVS’s PBM segment and the loss of its Tricare contract, I continue to think the company will be just fine in the long run, and management is still guiding for ~10% growth going forward. Shares are currently trading at just 14X expected 2017 earnings, which puts it at a 12% discount to my fair value PE target of 16.

I also added to Omega Healthcare Investors Inc. shortly after the election, when the stock was yielding around 8.5%. The double-whammy of increasing interest rates and potential changes to Obamacare hit shares hard, and I think the sell-off was overdone.

Looking at F.A.S.T. Graphs, Omega is trading at pretty much its lowest valuation in the last decade, and like CVS, I think the selloff is unjustified.

OHI F.A.S.T. Graph

REIT sector guru Brad Thomas agrees, and he had a nice review of the company on Seeking Alpha a few days ago. Brad said he expects 7% growth in the dividend in 2017, and I think that is reasonable. Long term, I think 5-7% annual growth is realistic as well.

With my purchase, I was able to lock in an 8.5% yield that has a good chance at growing at 5-7% per year going forward, meaning that my income from that purchase would double every 5 years or so. I’ll take it!

There was some more good news last week when Abbott Laboratories finally completed its acquisition of St. Jude Medical. The closing of this deal clears up some of the question marks for the company, and adds diversification to Abbott’s offerings. It is also expected to be accretive to 2017 and future earnings. In the short term it will likely slow buybacks and dividend growth as the company repairs it balance sheet, but in the long run I think it will be a positive acquisition for Abbott shareholders.

Amgen Inc. had some positive news as it won a judgement against Regeneron’s cholesterol drug Praluent, which takes the competitor’s drug off of the market. The market responded, sending shares of Amgen higher. I suspect this will be appealed by Regeneron, but for the time being, it should be a boost in Amgen’s sales.

Finally, some price moving news for Gilead Sciences, Inc., which announced the hiring of its new oncology chief, Alessandro Riva, whom they lured away from rival Novartis.  This is the type of move the market has been waiting for, as the company is in need of a new drug to replace sales from declining HCV revenues.

DoctoRX had a good overview of the hire, and some speculation on potential acquisitions in the oncology space that could move the needle for future growth.

Additionally, Chowder had an excellent comment earlier today about the move, and it instantly places GILD towards the top of his list for potential purchase:

I know some of you are going to think I’m crazy, but I am thinking the time to invest in GILD is near.
According to Jim Pearce of the publication Personal Finance, Gilead is sitting on a pile of money: $24.6 billion to be exact. The company spent $10 billion to repurchase stock during the first half of this year, but with its share price still dropping, perhaps it’s time for Gilead to use that money to make an aggressive move into the cancer immunotherapy field. It could do that quickly by buying one of the small R&D companies that could win FDA approval for a promising treatment within the next year…

Keep in mind, it is very possible that by the time the numbers are presentable enough for most to consider ownership in GILD, the price will have already risen 40%, 50%, maybe even more before that time comes. CAT would be a good example. People are still waiting on good numbers and CAT has already moved up 70% of its lows.
Is GILD a quality-enough company to survive its most recent problems, or have we seen the beginning of years worth of under-performance? If they were cash strapped, which they aren’t, then I wouldn’t consider an early entry, but I am of the opinion that if given enough time, they will recover and move beyond.
GILD is going to the top of my list of potential add on buys.

I completely agree with Chowder’s thoughts. The stock is dirt cheap by pretty much any metric, trading at just ~7X expected 2017 earnings and ~6X cash flows. I’m hopeful that shares remain depressed for another month so I can make a buy when I have cash available again. In the meantime, I just continue adding every quarter on my dividend reinvestment.

Add it all up, and the first week of 2017 has been a good one for my health care stocks. Here is how they have performed so far this year:

I’ll take a 4.4% weekly gain!

Conclusion

The great thing about buy and hold dividend growth investing is that you can take advantage of situations like this as they present themselves. The market is a pendulum, swinging back forth as sentiment changes from good to bad in different sectors of the market.

In 2015, energy stocks were on sale due to the crash in crude prices. In early 2016, industrial stocks bottomed out, offering good deals on companies like Caterpillar, Cummins, and the like. Now, there is an opportunity in healthcare, as fears persist on the potential ACA overhaul.

The important thing is to resist the urge to follow the herd and sell when things look grim. I don’t look at it as doom and gloom, I just lick my chops and enjoy the “blue light specials” the market is giving me.

Happy Investing!

Eric

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