7 Intriguing Healthcare Growth Stocks In The S&P 500: Part 2 by Chuck Carnevale –
The S&P 500 index is commonly used as a benchmark that investors use to measure the performance of their individual portfolios against. However, the S&P 500 is comprised of a very diverse group of companies. Just about every classification of company you can imagine can be found in the S&P 500. Furthermore, it is also comprised of all of the major industry sectors. With this series of articles, I have been examining the S&P 500 constituents in the healthcare sector. In part 1, I presented what I consider to be attractively valued dividend growth stocks in the S&P 500 healthcare sector. In this part 2, I will continue to examine S&P 500 healthcare stocks; however, with this article I will focus on fairly valued non-dividend paying growth-oriented S&P 500 healthcare constituents.
Passive versus Active Investing
Choosing passive versus active stock portfolios is one of the most hotly debated subjects regarding investing in stocks. Passive investing implies investing in an index fund while active investing means carefully handpicking specific stocks that meet your own goals, objectives and risk tolerances. Personally, I have always preferred what Wall Street calls active investing. However, I take exception with that designation. My personal investment philosophy is to invest in attractively valued businesses with the objective of holding for the long-term. Consequently, my investment process could hardly be called active because there is little turnover in my portfolios.
Therefore, I reject the designations active versus passive in favor of selective versus non-selective. It is my preference to carefully select my investments based on sound valuation and sound fundamental attributes. And more importantly, I prefer to select my investments based on their precise characteristics that meet my specific goals, objectives and risk tolerances.
For example, my current personal investment objectives are to seek fairly valued high-quality dividend growth stocks with a history of increasing their dividends each year. Therefore, my goal is not simply maximum current income; I am also keenly focused on constructing a portfolio with the opportunity for that income to grow each year. In this regard, I consider long-term capital gain a secondary objective. To be clear, I do expect to generate a reasonable level of capital gains with my dividend growth stocks. Investing in them when they are attractively valued gives me confidence that I can generate capital appreciation commensurate with each company’s earnings growth. However, I am not concerned with outperforming the market on a total return basis, but I am concerned with outperforming the market on a total dividend income basis over the long term.
This leads me to pointing out additional reasons why I reject passive – also known as index investing. For example, the S&P 500 is often used by investors as the primary benchmark to judge their performance against. However, that judgment is always based on total return calculations. I also often utilize the S&P 500 as a benchmark to judge my own portfolio against. However, relative to my current income oriented investment philosophy, my measurement for performance is based on how much dividend income my portfolio generates versus the S&P 500. Moreover, I also measure how fast that dividend income is growing compared to the S&P 500.
In this dividend income regard, the S&P 500 is at a great disadvantage. I took a rough count and found that approximately 85 of the S&P 500 companies pay no dividends at all, and another 58 yield 1% or less. Using round numbers, more than 25% of the S&P 500 constituents offer none or very little in the way of dividends. Since my objective is a growing dividend income stream, I see no logical reason to own the index when so many of the constituents do not meet my specific objectives.
Additionally, there are many S&P 500 constituents that I would never invest in on my own volition. Therefore, I see no reason why I would want to invest in them by purchasing the index when I would never invest in them by my own selection process. Moreover, my recent examination of the S&P 500 index constituents also discovered that the majority of the blue-chip dividend growth companies I would typically be attracted to are currently overvalued. Once again, if I am not willing to invest in them today because they are overvalued, therefore, I would not want to invest in them today via the index.
However, with all that said, I also recognize and accept the reality that not everyone has the same investment objectives as I do. There are many prudent strategies that investors can choose to employ and there are many different kinds of individual stocks that can be selected for common stock portfolios. To me, the key is to clearly identify your personal objectives and risk tolerances, and then choose appropriate investments that are compatible with those goals. Investing is not a one-size-fits-all process.
Attractive Healthcare Growth Stocks in the S&P 500 for the Total Return Investor
Therefore, even though I personally favor dividend growth stocks, there are also valid reasons and return opportunities available through investing in non-dividend paying but growing companies. As I pointed out in part 1 of this series found here I have recently been examining the healthcare sector of the S&P 500 looking for attractively valued stocks. Consequently, in addition to the fairly valued dividend growth stocks I reported on in part 1, I also came across a few intriguing growth stock opportunities in the healthcare sector of the S&P 500.
As a result, I felt compelled to share these findings with those who are interested in investing for growth or total return. The following “Portfolio Review” via FAST Graphs lists the seven S&P 500 healthcare growth stock constituents that I felt were worth taking a closer look at. There are various reasons why I chose to highlight these specific examples. In all cases, I felt that valuations were fair, and in a few cases – even compelling. On the other hand, for the few that I found compelling, there are reasons why valuations are so low. Consequently, I highly recommend conducting your own thorough due diligence and research. Nevertheless, as an old associate of mine used to like to say, the problems appear to be already in the price. Therefore, I will provide a brief commentary on each selection indicating why I chose to feature it in this article.
Allergan plc (AGN)
Below is a short business description courtesy of Morningstar:
“Allergan PLC is a specialty pharmaceutical company. The Company is engaged in developing, manufacturing and distributing generic, brand and biosimilar products.”
I was attracted to Allergan based on its high and relatively consistent earnings growth since 2008. However, I was also struck by the fact that the market has valued Allergan’s high earnings growth achievements at a market (average) valuation. I find this interesting, because it is very rare to find a company with such a high rate of earnings growth available at such a reasonable valuation. As evidenced by the blue normal P/E ratio line on the graph, the market has recently valued this stock at a 16 P/E ratio more or less. To