Five Cheap Healthcare Stocks That Promise Healthy Returns

At a time when the imminent rate hike in December has once again made investors cautious about its consequences on the investment world, events took a turn for the worse last Thursday. The healthcare equity market witnessed tremendous instability on the day, which disrupted the characteristic lull in this niche. Thanks to United Health’s (UNH – Analyst Report) slashed full-year guidance, on grounds of larger-than-expected loss owing to the much debated Affordable Care Act or Obamacare.

The disclosure of the largest U.S. health insurer’s expectation of a loss of up to $425 million or 26 cents per share, on account of the Obamacare plans in 2015, and its subsequent decision to entirely quit Obamacare after 2016 has raised alarm with regard to the entire situation. This has once again triggered doubts about the sustainability of Obamacare, creating tremendous uproar in the entire industry.

While UNH dropped 5.6% following the news, other major insurance and hospital stocks like Anthem, Aetna, Cigna, Community Health Systems, Tenet Healthcare and HCA Holdings also witnessed severe downturn. Needless to say, the entire health care industry was hit hard, with health care service providers, in particular, bleeding badly. The severity of this status quo can be measured by the statement of a Leerink Partners analyst, “We expect [UnitedHealth] and other plans will exit Public Exchanges in 2017 if they are unable to reach break-even in [the first half of 2016].”

Although the market started rebounding from the next day, the incident has raised doubts regarding the credibility of the Affordable Care Act in its entirety, otherwise originally created to provide subsidized health insurance coverage. With the presidential election approaching, this incident, as usual, has added additional impetus to the already ongoing hullabaloo. The Democrats and the Republicans now have yet another reason to dig out at each other.

Time to Hold On?

In the face of such odds, before we scurry in panic, let’s realize that there is no dearth of growth drivers in the space. Healthy merger and acquisition trends, encouraging industry fundamentals, promising new drugs, growing demand in emerging markets and ever-increasing healthcare spending are crucial factors that make the health care space a lucrative bet in the long term.

5 Attractive Bets

We believe last week’s market sluggishness has created an amazing opportunity for investors in the healthcare space. While the market is still down, following the right screening options may lead to an array of undervalued stocks that promise strong upside potential, offering investors a scope to reap impressive profits down the line.

The first thing that comes to mind, when determining whether a stock is overvalued or not, is its price-to-earnings (P/E) multiple. We hereby shortlist healthcare stocks with forward P/E ratio trading below 15x. Standard criterion holds that, anything under 15x will be dirt cheap.    

Additionally, we zero in on those stocks fulfilling the above criterion that also carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). This ensures earnings estimates are on the rise.