What are we looking for?

Health care has long been considered one of the most resilient defensive sectors in equity markets as demand for health care services, pharmaceuticals and medical devices tend to remain stable regardless of the broader economic environment.

Given the current uncertain macroeconomic environment driven by geopolitical tensions, oil market volatility contributing to inflationary concerns and technological shifts toward artificial intelligence raising fears of labour market disruptions, defensive stocks may offer opportunities for investors who are seeking capital preservation. Therefore, we are looking for health care stocks that offer the investors stability and strong profitability.

The screen

We screened the U.S. health care universe (as classified under the Global Industry Classification Standard) with market capitalization greater than US$25-billion, and ranked companies in the top 25th percentile based on the following criteria:

Five-year average return on invested capital (ROIC) greater than 15 per cent – indicating companies that generate strong returns relative to the invested capital;Positive three-month earnings revisions – positive revisions indicate improving analyst expectations and strengthening earnings outlook;10-year EBITDA (earnings before interest, taxes, depreciation and amortization) standard deviation below 15 per cent – this metric allows us to identify companies with more stable operating earnings over time.

For informational purposes, we also include the price-to-earnings ratio (P/E), one-year price return and dividend yield for each stock.

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What we found

Resilient health care companies with stable operating performance.

Cardinal Health Inc. (CAH-N) is a health care services and products company that distributes pharmaceuticals and medical products to pharmacies, hospitals and health care providers. The company stands out with the highest positive earnings revision in our screen of 5.3 per cent, reflecting strong analyst earnings expectations. Cardinal also demonstrates impressive profitability with a ROIC of 22.3 per cent, while its one-year price return of 71.9 per cent signals momentum. The company represents an attractive opportunity for investors who are seeking momentum, quality earnings and improving earnings expectations.

Zoetis Inc. (ZTS-N) is a global animal health company that discovers, develops, manufactures and commercializes medicines, vaccines and diagnostic products for livestock and companion animals. The company stands out with lowest 10-year EBITDA standard deviation of just 2.5 per cent, representing exceptional stability in its operating earnings. Zoetis also exhibits the highest rank in our screen while trading at a decent P/E ratio of 18.0 times earnings. The company provides an opportunity for investors who are seeking earnings stability at a reasonable valuation.

Intuitive Surgical Inc. (ISRG-Q) develops robotic-assisted surgical systems that enable minimally invasive procedures across a variety of medical specialties. The company reports the third-highest earnings revision of 3.2 per cent and a strong five-year average ROIC of 21.2 per cent, reflecting efficient capital deployment. Intuitive continues to benefit from the long-term adoption of robotic-assisted surgery technologies that support future growth potential. However, investors should note that it trades at the highest P/E ratio in our screen, at 52.9 times earnings, which may warrant caution for valuation-sensitive investors.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

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Anuj Anand, MBA, LLM is an Investment Analyst at Inovestor.