Health care stocks have soared in 2013. Does that mean that there aren’t good bargains still to be found for value investing fans? Not at all. Several stocks in the sector look to be priced quite attractively. Here are three health-care value investing plays that show decent long-term potential.
1. Put a little jazz in your portfolio
There are plenty of things about Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) that should put a little bounce in your step. The company’s latest quarter saw revenue growth of 91% year-over-year. Adjusted earnings were up 63%. On top of those stellar results, Jazz announced a $200 million share buyback.
The problem is that some think Jazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ)’s future could be more of a nightmare. The company derives 60% of its revenue from narcolepsy drug Xyrem. While the first patents on Xyrem don’t expire until 2019, Jazz faces litigation with two companies that want to market generic versions of the drug. Recent comments from Jazz CEO Bruce Cozadd fueled concerns that a generic product could come sooner rather than later. I suspect that these worries are overblown and have helped makeJazz Pharmaceuticals plc – Ordinary Shares (NASDAQ:JAZZ) an even more attractive bargain.
2. Indications could be good
Questcor Pharmaceuticals Inc (NASDAQ:QCOR) ranks as one of the more topsy-turvy stocks around. Shares soar and sink regularly on nearly any type of news.
You won’t find too many cheaper stocks in health care, though. Questcor Pharmaceuticals Inc (NASDAQ:QCOR)’s trailing P/E of 12 and forward P/E multiple of 8 certainly look intriguing. Throw in a return on equity over 92% and a dividend yield of 2.7% to that intriguing proposition, too.
What’s the catch? Some say that it’s only a matter of time before sales of Questcor Pharmaceuticals Inc (NASDAQ:QCOR)’s Acthar gel implode. Skeptics think that the drug is too expensive and isn’t proven to be effective for many of the indications for which it is used. There are plenty of these naysayers: Questcor’s short interest stands at nearly 60%.
The company continues to aggressively market Acthar for additional indications with a big push under way now for rheumatology indications. Shipments dipped a bit in the first quarter, but Questcor Pharmaceuticals Inc (NASDAQ:QCOR) says that the second quarter started out strongly. My view is that if the company announces positive results three months from now, the stock could be a good one to scoop up.
3. On the mend
Select Medical Holdings Corporation (NYSE:SEM) seems to have everything going against it these days. The specialty hospital and outpatient rehab center operator reported dismal first-quarter results. It gave lackluster guidance for the full year. And short-sellers are smacking their lips — with a 65% increase in shares sold short in the last two weeks of April.
All of this bad news has taken its toll on Select Medical shares, but it has also made the stock look undervalued. The current trailing P/E and forward P/E multiples stand just above 8. For old school value investing proponents, Select’s price-to-book is only 1.5. Those are numbers that Warren Buffett’s mentor, Ben Graham, would like.
I doubt that 2013 will be a great year for Select Medical Holdings Corporation (NYSE:SEM). However, over the longer term, this stock could be a winner. Demand for specialty hospitals and rehab centers should increase as Americans age. Select’s current valuation could also make it an appealing acquisition target. And while investors wait for better days, the 4.9% dividend yield looks pretty nice.
The trick
Unfortunately, simply buying stocks with low P/E multiples doesn’t guarantee success. The trick to value investing lies in only buying companies that the market prices lower than they’re really worth. All three of the companies mentioned have potential “gotchas” that could warrant their current low valuations. I think, though, that these stocks could be some of the best value investing plays in health care right now. Are these “intelligent investor” ideas or “crazy investor” ideas? Chime in with your thoughts in the comments below.
The article 3 Value Investing Plays in Health Care originally appeared on Fool.com and is written by Keith Speights.
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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