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number cruncher

Michael Cloherty is senior account manager for StockPointer at Inovestor Inc.

What are we looking for?

Given recent headlines with takeover and merger activity in the health-care sector, investors could soon find themselves looking to replace certain holdings, so we decided to look for economically strong health care stocks.

The screen

We searched for the top 20 U.S. listed health-care stocks with a minimum market cap of $10-billion (U.S.) and looked at the following metrics:

Economic performance index (EPI) We calculate EPI as return on capital divided by the cost of capital. EPI helps find companies that create the highest economic profit and as investors we want a ratio higher than 1.0 because it reflects wealth creation.

A positive free cash flow to capital ratio We're looking for companies with an ability to generate cash over the past trailing 12-month period relative to the total invested capital in the company.

Future growth value divided by market value of total capital (FGV/MV) This ratio helps determine whether the stock is trading at a discount or premium to its growth. A negative FGV/MV indicates a current market value that is lower than the current value of the company's operations.

More about StockPointer

StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.

What did we find?

Gilead Sciences Inc. is the top company in terms of wealth creation with a return on capital five-and-a-half-times higher than its cost of capital. It generates the highest free cash flow to invested capital and it's the third-largest on the list based on market cap.

The only company currently trading at a discount relative to its future growth, where it could imply that the market might not recognize its full value, is Cigna Corp.. It is also the only company in the list focused on health insurance.

Investors are advised to do additional research prior to investing in any of the companies mentioned.

U.S.-listed health care stocks