GuruScreens - upgrades and downgrades - July 15th

Population aging will no doubt be amongst the most important demographic trends that affect us as we progress through the 21st century. This is likely to be good news for companies like Shire (SHP) and GlaxoSmithKline. Demand for healthcare should be stimulated as the ‘baby boomers’ retire and the elderly proportion of the grows. 

Indeed, a recent study by the consulting group, McKinsey, estimates that UK healthcare could be a £200bn industry by 2030. With this theme in mind, we explore how many companies in the healthcare sector qualify for Stockopedia’s GuruScreens.

Immunodiagnostic Systems: Dividend screen hat-trick

Academic studies have shown that during sideways markets, high dividend paying stocks deliver a higher proportion of returns. It is therefore interesting to note that Immunodiagnostic Systems(IDH)- a producer of medical diagnostic products - qualified for the Best Dividends Screen on 2 July. The company made the grade on the basis that it has paid dividends every year, without fail, for eight years. The company also has a low payout ratio and limited debt.

Immunodiagnostic Systems also qualifies for the Dividend Achievers Screen because the company has a high 5 year EPS compound annual growth rate, alongside a current ratio that exceeds 1.5 (not to mention the eight year dividend streak). In addition, the company qualifies for the Geraldine Weiss Screen, which looks for companies that have grown their dividends and earnings consistently. Immunodiagnostic’s annual report for last year attributes this growth to “greater market penetration of core markets (US and Europe) with geographic expansion targeted at the fast-growing markets of China and Brazil”.

Takeover rumours push Shire onto momentum screens

Shire (SHP) is a specialty biopharmaceutical company. It has been identified as a takeover target by the US

 group, AbbVie. Back in June, AbbVie offered to buy Shire shares at a 30% premium. Although Shire’s CEO Flemming Ornskov has urged shareholders to reject AbbVie’s offer, he has also said that he would consider selling the company for an appropriate price.

This gossip around a takeover has helped drive Shire’s price upwards. It has beaten the market by 110% over the last year, 68% over the last 3 months and 40% over the last month. The company also trades above its respective 50 and 200 day moving averages.

As aresult of this strong momentum, the company currently qualifies for the Value Momentum Screen, which looks for stocks with high relative strength and a low PEG.

Hikma: Screening for quality and momentum

A second pharmaceutical company that has strong momentum is Hikma (HIK). It has beaten the market by 55% over the last year, 15% over the last three months and 5% over the last month. The brokers have also been upgrading their EPS forecasts for 2014. Back in February, the EPS forecast was $0.94. It is now $1.19. As a result, Hikma qualifies for the Josef Lakonishok Momentum Screen, which tries to identify companies with recent earnings surprises, combined with good relative strength.

This momentum has been driven by a healthy set of annual results that revealed strong quality credentials. Indeed, the company qualifies for the T Rowe Price Screen, which filters for companies with solid profit margins, alongside EPS growth that has been higher than the market average over the last five years. This growth has driven by doxycycline sales, and improvement in margins in ‘Generics’ and ‘Injectables’.

Kirkpatrick and O'Shaugnessy qualifiers

If Pfizer’s bid for AstraZeneca succeeded earlier this year, it would have been the largest takeover in UK corporate history. Why was Pfizer attracted to AstraZeneca? AstraZeneca does qualify for James O'Shaugnessy's Cornerstone Value screen. In his seminal book, What Works on Wall Street, O'Shaugnessy showed that large-caps stock with above average stock liquidity, cash flows, and dividend yields performed best over the long term. Our version of the screen therefore seeks to identify stocks which meet these criteria. A second company which qualifies for the O'Shaugnessy screen is GlaxoSmithKline. This company has consistently generated more operating cashflows than earnings per share. It is also a very liquid company, with nearly 5 billion shares outstanding.

Finally, Abbott Laboratories has qualified for the Charles Kirkpatrick Growth Screen. This screen looks for companies that rank very highly against the market in terms of operating profit growth and proximity to 130d moving average. Abbott Laboratories - which develops science-based health care products - has a large and increasing percentage of its business in emerging markets. The company has grown profits faster than the market average as emerging markets’ populations and their buying power expands.

Conclusion

As always, this column is not written as investment advice. It merely aims to support investors in their research. Always do your own research and feel free to get back with any comments.