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Summary

  • The health care sector recorded the worst performance since the beginning of the year.
  • In addition to DaVita, AMN Healthcare Services and HCA Healthcare qualified for the exam.

US stock indexes were all down the morning after Election Day, with the outcome of several key races still too close to announce as Americans weigh their priorities on health care, education, border security and the state of the economy, among other concerns.

The Dow Jones Industrial Average slid 112 points Wednesday morning, or about 0.3%, while the S&P 500 index fell 0.3% and the tech-heavy Nasdaq Composite lost 0.6%.

While most sectors have performed poorly so far this year due to rising interest rates and runaway inflation, the healthcare sector was the worst performer, falling 52%. 12% since the beginning of the year.

Therefore, investors might be interested in finding opportunities among undervalued health care stocks that have predictable performance.

The predictable undervalued filter, a premium feature of GuruFocus, determines whether a stock is undervalued or overvalued using two methods: discounted cash flow and discounted earnings.

Under both methods, companies with a discount above zero are considered undervalued, while discounts below zero are considered overvalued. Company predictability rates are then determined based on their historical performance over the past decade.

The screener also looks for companies with a predictability rating of at least four out of five stars.

Based on these criteria, a number of technology stocks qualified for review as of November 9, including DaVita Inc. (DVA, Financial), AMN Healthcare Services Inc. (AMN, Financial) and HCA Healthcare Inc. (HCA, Financial) .

DaVita

Shares of DaVita (DVA, Financial) are currently trading 69% below the DCF value of $218 and 46% below the discounted earnings value of $123.

The Denver-based healthcare company, which provides kidney dialysis services through a network of ambulatory care centers, has a market capitalization of $6.06 billion; its shares were trading around $67.22 on Wednesday with a price-to-earnings ratio of 9.85, a price-to-book ratio of 11.39 and a price-to-sales ratio of 0.57.

The GF value line suggests that the stock, while undervalued, is a possible value trap currently based on historical ratios, past financial performance and analysts’ future earnings projections. Therefore, potential investors should conduct thorough research before making a decision.

Additionally, the company’s GF score of 89 out of 100 indicates that it has good outperformance potential thanks to high points for profitability, growth and GF value as well as medium scores for momentum. Financial strength, however, had a low rating.

GuruFocus rated DaVita’s financial strength at 3 out of 10. Due to the company issuing new long-term debt over the past three years, interest coverage is insufficient. Additionally, Altman’s low Z-Score of 1.33 warns that the company could be at risk of bankruptcy. However, the return on invested capital exceeds the weighted average cost of capital, meaning that value is created as the business grows.

The company’s profitability fared much better, scoring 9 out of 10 due to strong margins and returns on equity, assets and capital that outperform the majority of its competitors. DaVita also has a moderate Piotroski F-Score of 4 out of 9, implying conditions are typical of a stable business, and steady growth in profits and revenue which contributed to a four-star predictability rating. According to research by GuruFocus, companies in this ranking have an average return of 9.8% per year over a 10-year period.

Of the gurus invested in DaVita, Warren Buffett (Trades, Portfolio) holds the largest stake with 39.54% of his shares outstanding. Ray Dalio’s Bridgewater Associates (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also have positions in the stock.

AMN health services

Shares of AMN Healthcare Services (AMN, Financial) are trading 67% below the DCF value of $373 and 52% below its present earnings value of $259.

The Coppell, Texas-based recruitment company, which supplies hospitals and health care facilities with traveling nurses and other temporary allied health professionals, has a market capitalization of $5.31 billion; its shares were trading around $122.58 on Wednesday with a price-to-earnings ratio of 14.81, a price-to-book ratio of 4.68 and a price-to-sales ratio of 1.03.

According to the GF Value Line, the stock is currently slightly undervalued.

The company also has a GF score of 90, receiving high points for growth, profitability and GF value, medium scores for financial strength and a low score for momentum. As such, AMN Healthcare has strong outperformance potential.

AMN Healthcare’s financial strength was rated 6 out of 10 by GuruFocus based on a comfortable level of interest coverage and a high Altman Z-Score of 4.91 which indicates that it is in good standing despite the asset accumulation at a faster rate than income growth. . The ROIC also eclipses the WACC, so value creation occurs.

The company’s profitability was rated 9 out of 10. Although the operating margin is down, the strong returns outpace the majority of industry peers. AMN Healthcare also has a high Piotroski F-Score of 7, meaning conditions are sound, while steady growth in profits and revenue has contributed to a 4.5-star predictability ranking. GuruFocus found companies with this rank yield, on average, 10.6% per year.

With 0.76% of its shares outstanding, Jim Simons’ Renaissance Technologies (Trades, Portfolio) holds the largest position in AMN Healthcare. Other big guru investors are Ken Heebner (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Dalio’s company, Greenblatt and Keeley-Teton Advisors, LLC (Trades, Portfolio).

Health HCA

Shares of HCA Healthcare (HCA, Financial) are trading 34% below the DCF value of $322 and 53% below the discounted earnings value of $449.

The Nashville, Tennessee-based company, which owns and operates healthcare facilities across the United States, has a market capitalization of $60.10 billion; its shares were trading around $212.62 on Wednesday with a price-to-earnings ratio of 12.01 and a price-to-sales ratio of 1.07.

Based on the GF value line, the stock appears to be fairly valued right now.

The company has high outperformance potential with a GF score of 94. It recorded high points for profitability, growth and momentum as well as medium scores for GF value and financial strength.

GuruFocus rated HCA Healthcare’s financial strength at 4 out of 10. Although the company has issued new long-term debt in recent years, it is manageable due to adequate interest coverage. The Altman Z-Score of 2.47, however, indicates that the company is under some pressure. ROIC also eclipses WACC, so value is created.

The company’s profitability fared better with a score of 10 out of 10. In addition to expanding operating margin, the strong returns outperform the majority of competitors. HCA also has a high Piotroski F-Score of 7, while steady profit and revenue growth has contributed to its five-star predictability ranking. Data from GuruFocus shows that companies in this ranking have an average return of 12.1% per year.

First Eagle Investment (Trades, Portfolio) is HCA’s largest guru shareholder with a 1.56% stake. The Vanguard Health Care Fund (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Bill Nygren (Trades, Portfolio) and Hotchkis & Wiley also have significant holdings.

Additional stock options

Other health care stocks that made the cut were Elevance Health
ANTM
Inc. (ELV, Financial), UnitedHealth Group
A H
Inc. (UNH, Financial) and Edwards Lifesciences
EO
Corp. (EW, Financial).

Disclosures

I/we have no positions in the stocks mentioned and I do not intend to buy any new positions in the stocks mentioned in the next 72 hours.