While most of the market focuses on hyper-growth technology stocks rewarded by Wall Street as long as they mention the word "artificial intelligence" in their earnings calls, the reality is that the fundamentals now favor other (safer) areas of the economy.
Big traders and investors at places like The Goldman Sachs Group (NYSE: GS) and other respectable investment houses tend to employ a process called ‘top-down’ analysis, where the fundamental trends of an industry and the economy itself are taken into account to select winning stocks, but more on what that picture is looking like today in just a bit.
For now, all you need to worry about is that medical stocks are becoming more and more attractive today; names like Vericel (NASDAQ: VCEL), Axsome Therapeutics (NASDAQ: AXSM), and three other worthy peers can quickly become just the thing that these traders and investors look for to deploy their available investment dollars to squeeze alpha out of the market.
Don’t fight the market
Following the past quarterly trend in the ISM services PMI reports, you will notice that the healthcare sector has pushed out three consecutive months of expansionary activity. This means that the odds are high for stocks in that space to report higher quarterly earnings per share. Not only that, healthcare was the largest expanding sector for January.
The PMI is one of the first leading indicators that these investors look into for generating ideas. Still, it is only a fraction of the entire picture. Understanding this next indicator can also help you understand why this sector will attract all the heat in the following months.
Employment trends can give you another idea of what the economy is doing lately, and the latest employment situation report says a lot about the healthcare space. Healthcare companies added 70.3 thousand jobs in the past month, whereas the entire U.S. economy added 353 thousand; that’s almost 20% of all new hires!
Because of these heating metrics, markets are looking to these stocks to make a decent profit. But you cannot just take the fundamental story at face value and go punting your money blindly into any stock just because it operates in the sector, so here is how you can make better picks.
Two things drive professional traders to pick stocks once they decide on the sector. First, they prefer to see positive outliers in the next twelve months of earnings per share projections; who doesn’t like growth, right? Secondly, stocks that are set to grow typically command a higher valuation multiple, so you also need to see positive outliers calling for premium valuations.
Know when to hold ‘em
Knowing what you know now, it shouldn’t be a surprise to see these peers commanding higher valuations based on how explosive their earnings are set to grow. Vericel analysts see earnings growing by as much as 366.0% for the next twelve months, significantly above the 15.1% industry average.
This is why the stock trades at a forward P/E ratio of 76.6x, representing a 333.0% premium to the sector’s average 17.7x valuation. With Axsome, the story is not too far away either, with analysts projecting a 130.9% EPS advance in the next year, calling for a 415.0% premium valuation with its 91.0x forward P/E.
Other names worthy of mention are Argenx (NASDAQ: ARGX), Azenta (NASDAQ: AZTA), and even Inari Medical (NASDAQ: NARI). You can probably guess what these stocks all have in common, right? Triple-digit EPS growth rates, premium valuations to the sector, and positive outliers within an industry that is quickly heating up.
Argenx analysts think that the stock could grow its earnings by as much as 243.0% in the next year; markets don’t think this is far from reality as they are willing to pay a 479.0% premium to the sector through its 102.4x forward P/E valuation. These same analysts set a $525.9 share price target on the stock, which still implies a 33.7% upside from today’s prices.
Azenta brings another interestingly bullish outlook from analysts, as they want to see EPS advance by 136.0%, a fact that traders have bid up to a 534.0% premium to the rest of the group, willing to pay a staggering 112.0x forward P/E multiple. There is a bullish trend in the industry, right?
Last but not least, the group's most ‘expensive’ name is Inari Medical, but remember the saying, “It must be expensive for a reason.” The reason behind it is, well, really straightforward. Analysts boldly project earnings to jump by 390.0% this year, justifying a 199.7x forward P/E multiple; otherwise, there will be a 1,000.0% premium to the sector.
Analysts feel comfortable with these projections, as the price target has been set at $81.3 a share, showing that this name could go higher by 43.7% from where it trades today.
Congratulations on the top-down; the list quickly grows significant for the stocks that can quickly become trader favorites and see the right price action very soon.
