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Value Expert Eyes Healthcare

12/08/2016 9:00 am EST


John Buckingham

Editor, The Prudent Speculator

We believe that equities remain attractive for the long haul, given the improving economy, solid balance sheets, generous yields and reasonable valuations, asserts John Buckingham. Here, the editor of The Prudent Speculator reviews three of his recommended healthcare sector holdings.

Abbott Labs (ABT) slightly beat analyst expectations on both the top and bottom lines for Q3, but the shares sold off, with the loss on the year now sitting at more than 16%.

While there also has been regulatory noise surrounding the company’s big acquisition of medical device maker St. Jude Medical, it seems like the transaction will ultimately be approved.

The $25 billion deal is expected to be accretive in the first full year following closing and the expanded Abbott should have an industry-leading pipeline expected to deliver a steady stream of new medical device products.

The combined firm should generate solid free cash flow, which can be used to reduce debt and support the dividend. The yield is presently 2.7%.

Cardinal Health (CAH) is one of the nation’s largest wholesalers of pharmaceutical and medical products.

Although shares fell hard after the most recent earnings report, CAH reacted positively to the results of the U.S. Election as investors are now expecting that the regulatory environment will be a bit less hostile.

We believe the selloff was very much overdone and we see plenty of upside in the name.

CAH continues to generate strong free cash flow, which can be used to increase the dividend (the yield is currently 2.5%), buy back stock and invest in the business via research, development, mergers and acquisitions.

Gilead Sciences (GILD) is a biotech giant whose portfolio of products and pipeline of investigational drugs includes treatments for HIV/AIDS, liver diseases, cancer, and cardiovascular conditions.

The shares are down some 28% this year as the firm’s blockbuster Hepatitis C franchise has been under pricing and competitive pressures.

We continue to be fans of Gilead shares and believe they offer attractive upside.

Headwinds will persist, but we like that the company’s mountain of cash allows it to buy back shares ($12.3 billion in Q3) and increase the dividend (currently yielding 2.6%).

GILD trades at less than 8 times earnings, while consensus EPS forecasts for this year and each of the next three years exceed $10.50.

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