The healthcare industry has a reputation for being fairly resistant to recessions. After all, people get sick whether or not they're employed, and people are often willing to sacrifice other priorities in order to cover their healthcare spending needs when money gets tight.
Still, that doesn't mean healthcare stocks can only move upward. Both economic fears and company-specific issues can send a company's stock price tumbling. In addition, the market may not adequately recognize the growth potential of a business. Those sorts of things can lead to a company's stock being available at a reasonable price.
With that in mind, we asked three Motley Fool contributors to each pick a healthcare stock that looks worthy of purchasing this August. They selected Abiomed (ABMD), Trulieve Cannabis (TCNNF -1.88%), and Cardinal Health (CAH -0.30%). Here's why.
A fallen angel
Abiomed is a medical device company that is focused on cardiovascular disease. The company sells a range of miniaturized heart pumps that speed up the recovery process after a heart attack or are used to make high-risk heart surgery safer.
Abiomed has been a market darling for many years but the last 18 months have been ugly. Shares have fallen by more than 57% from their recent high.
What can explain such a horrific pullback? I believe that two factors are to blame:
- The Food and Drug Administration sent a confusing letter to healthcare providers in February related to Abiomed's Impella RP pump. The letter made it seem like the device wasn't safe, but that wasn't the case at all. Although the FDA sent another letter in May stating that the Impella RP was safe and effective, the company's growth rate slowed considerably.
- The valuation got way ahead of itself. Abiomed was trading for more than 30 times sales late last year.
When combined, the huge sell-off makes sense.
Thankfully, I believe that the torrid rate of growth will pick back up once providers are educated about the FDA's updated letter and new products hit the market. If I'm right, then Abiomed's stock is likely to be a steal at today's prices.
This "budding" healthcare stock is dirt cheap
Sean Williams (Trulieve Cannabis): If I were to mention "healthcare stocks," you'd probably think of drugmakers, device makers, and hospitals. But an under-the-radar healthcare stock that looks exceptionally attractive in August is multistate dispensary operator Trulieve Cannabis.
Although Trulieve operates in four states, it's primarily focused on the Florida market, which has legalized medical marijuana and might aim to wave the green flag on recreational weed in 2020. Despite being only legal from a medical perspective, Florida is on track to be one of the country's most lucrative marijuana markets. Trulieve, which is based in Florida, recently opened its 30th store in the Sunshine State, which is why it's been able to gobble up so much market share. And, with the company putting most of its attention on Florida, it's been able to build up its brand more effectively than its peers.
Of course, Trulieve does have plans to push into new states. It has a budding presence in California, Massachusetts, and Connecticut, with California being the top-selling legal weed market in the world. Although the company's costs are liable to rise with this multistate expansion, it'll be well worth it for Trulieve's long-term prospects.
So, what exactly are investors getting with this small-cap, U.S.-focused pot stock? How about a company that could nearly quadruple sales and adjusted EBITDA between 2018 and 2020. After recording $102.8 million in revenue and $45.6 million in adjusted EBITDA in 2018, Trulieve guided for $380 million to $400 million in 2020 sales, with $140 million to $160 million in adjusted EBITDA. The company's sub-11 forward price-to-earnings ratio is currently the lowest among all cannabis stocks.
While the road could certainly be bumpy for marijuana stocks, few, if any, offer better value than Trulieve Cannabis.
It's trading like its future has flatlined
Chuck Saletta (Cardinal Health): Companies are valued based on the present value of the cash flows they're expected to generate between now and when they eventually cease operations. With a business expected to shrink slightly this year and only grow around 3% annualized over the next five years, Cardinal Health's shares are trading near their 52-week lows.
A key headwind affecting the company is a risk that it may be partially liable for a role in the opioid crisis, which is helping keep the stock down. With a tepid growth rate and litigation overhang like that, it's no wonder its shares are down. Yet in that decline in its stock sits the potential opportunity for decent longer-term returns for investors considering buying it this August.
For one thing, the company's share price gives it a juicy 4.5% yield, which only requires around 42% of its earnings to pay out. That gives it a decent amount of money to reinvest to restart growth and sufficient breathing room to handle a reasonable recession and still maintain its dividend. For another, while it does carry debt, its relatively reasonable debt-to-equity ratio around 1.3 combined with a current ratio above 1.0 means it should be able to handle another hiccup in the debt markets.
In addition, Cardinal Health currently trades at around eight times its anticipated forward earnings. At that level, it'd be fairly valued for a business expected to only hold steady, with virtually no growth ever again. With that type of valuation, any return to growth could be met with a decent recovery in its stock price. The combination of its dividend, its balance sheet, and its valuation after its share price drop makes this August a good time to consider buying Cardinal Health's shares.