The last few months have seen high volatility and a rising market trend, as one of the biggest sources of uncertainty – namely, the election campaign – has worked itself out.
The current political climate is viewed as favorable for healthcare investment – tax increases and further regulations on drug price, anticipated before the elections, when prognosticators expected the Democrats to ride a ‘blue wave’ to an across-the-board victory, are now seen as unlikely under a government with close partisan divisions.
In light of the new conditions, Goldman Sachs strategist David Kostin has upgraded his stance on the healthcare sector from underweight to overweight.
Kostin is recommending healthcare stocks as the value-end of a diversified portfolio strategy. He points out that the sector is up 6% in the past month, but adds that it is still priced at bargain levels, saying, “Healthcare is the best opportunity from a value perspective. They're the cheapest they've been, so that's an area of focus.”
But how are investors supposed to distinguish between the long-term healthcare winners and those set to come up short? One strategy is to follow the activity of the pros.
Enter David Shaw, who is widely known for his impressive stock picking abilities. Shaw’s name is familiar to followers of quantitative trading. He helped develop the techniques in the late 80s, and his early mastery of quant helped him grow his firm, D. E. Shaw, into an $82 billion giant of the hedge industry. While most of D.E. Shaw’s day-to-day operations are now managed by the Executive Committee, Shaw still remains involved in higher-level strategic decisions.
Bearing this in mind, we decided to look at D. E. Shaw's recent activity for inspiration. Running three healthcare stocks the fund picked up during Q3 through TipRanks’ database, we found out that the analyst community is also on board, as each sports a “Strong Buy” consensus rating.
Vertex Pharmaceuticals (VRTX)
First up is Vertex Pharmaceuticals, a Boston-based company that got its start creating medications for patients with cystic fibrosis, a serious, and usually fatal, genetic lung disease. Vertex currently has four approved CF treatments on the market, along with an active research pipeline focusing on drugs to treat rare genetic disorders. Vertex’s strategy is to develop medications that will treat or ameliorate the underlying genetic mutation of such diseases, rather than suppress symptoms. The company has treatments under development for a varied range of conditions, including sickle cell disease, beta thalassemia, and Duchenne muscular dystrophy.
The Company had a strong financial performance in Q3, generating $1.54 billion, up 62% year-over-year. The EPS came in at $2.64, beating the forecast by 10.5%.
But not everything has gone as planned. The company announced in October that it would discontinue work on the Phase 2 study of VX-814, the prime drug in its pulmonary research pipeline, due to safety concerns. The move pushed the shares down 20%, and they still have not recovered.
Things make an interesting background to Shaw’s recent purchases. The fund bought 203,308 shares of VRTX in Q3. At current prices, this is worth $46.8 million. It’s important to remember that Shaw made these purchases before the VX-814 news broke.
Covering Vertex for Piper Sandler is 5-star analyst Edward Tenthoff, who writes of the stock, “While VX-814 for alpha-1 antitrypsin deficiency (AATD) discontinuation was disappointing, we think sell-off in VRTX shares was overdone. Follow-on VX-864 has initiated Phase II study, with distinct structure, that may alleviate VX-814's scaffold mediated liver toxicity with data expected in 1H:21. Additionally, Phase II study of VX-147 in FSGS is enrolling with data expected in 2021."
To this end, Tenthoff rates VRTX an Overweight (i.e. Buy). He sets a $307 price target that implies a 33% upside potential for the next 12 months.
Overall, it appears that Wall Street agrees with Tenthoff. VRTX shares have a Strong Buy analyst consensus rating, based on 14 Buys and 4 Holds. The stock’s $287.50 average price target suggests it has room for 24% growth in the year ahead.
Cigna Corporation (CI)
Cigna is one of the biggest names in the healthcare insurance industry. Subsidiaries of the Connecticut-based company provide a range of medical, dental, disability and other related insurance products, and the company is a major provider of both Medicare and Medicaid plans. Cigna boasted over $153 billion total revenue for calendar year 2019.
The company is on track, this year, to exceed the 2019 revenues. The Q1 top line came in at $38 billion, and revenues have grown since then. For the third quarter, the result came in at $41 billion, while EPS came in at $4.41. EPS has come in above expectations for 7 quarters in a row. The results show the quality of a major medical insurer at a time of global health crises.
Among the fans is David Shaw. 782,737 shares were bought up by D. E. Shaw in Q3, with the total position now landing at 804,425 shares. The position is valued at $168 million.
Deutsche Bank analyst George Hill covers Cigna, and he is also impressed by what he sees. Of the company’s current position, he writes, “Cigna saw a quarterly uptick in medical utilization—a trend the company believes will persist into the back-half of the year and into FY21, likely resulting in more normalized MLR trends."
"We continue to see Cigna as one of the most attractive growth stories in the MCO space trading at a compelling valuation, though we concede that investor pessimism regarding the commercial insurance space could prevent the shares multiple from expanding in the near to medium term," the analyst concluded.
In line with these comments, Hill rates CI shares as a Buy along with a $280 price target. This figure indicates confidence in 34% upside growth for 2021.
Overall, the 14 recent reviews on Cigna break down to 13 Buys and 1 Hold, making the analyst consensus rating a Strong Buy. The stock is selling for $209.35, and the $255.57 average price target suggests a 22% upside from that level.
Syneos Health (SYNH)
Last but not least is Syneos, a contract research organization that bills itself as offering biopharmaceutical solutions. Syneos’ services include bioanalytics, clinical development, commercialization, diagnostics, and medical devices. The company serves a global customer base, helping research companies conduct late-stage clinical trials. Syneos offers the multidimensional expertise that focused biopharms won’t necessarily have.
The value of the niche can be seen from the revenues and earnings -- Syneos regularly tops $1 billion in revenue per quarter; the recent Q3 result was $1.1 billion. EPS has been climbing since the first quarter, when the corona crisis hit the economy, and the third quarter earnings, at 93 cents per share, beat the forecast by 17%. The year-over-year EPS growth was stronger, at 20%.
Quant expert Shaw is clearly impressed by SYNH, enough to buy an additional 164,135 shares, nearly doubling his holding in the stock. Shaw’s current stock ownership in Syneos is worth $21.9 million.
Reviewing Syneos for JPMorgan, 5-star analyst Tycho Peterson says, “We expect the company to outgrow industry peers aided by a diversified global footprint and therapeutic expertise in high-growth segments within clinical development including CNS, oncology, and complex diseases over the next several years. As such, we see room for upside from current levels as SYNH continues to generate revenue and earnings growth above industry averages.”
Peterson backs his comments with an Overweight (i.e. Buy) rating, and an $85 price target that suggests the stock has room to grow 30% over the next year.
All in all, Syneos gets a Strong Buy rating from the analyst consensus. The rating is supported by 6 Buys and 1 Hold. The average price target, of $78.57, implies an upside potential of 20% from the current trading price of $65.65.