Three "Healthy" Ideas for Value Investors
John Buckingham is a leading proponent of value investing, focused on a widely diversified portfolio for long-term investors. Three of the latest buys in his The Prudent Speculator come from various sectors of the healthcare market—a drugstore chain, a healthcare REIT, and a pharmaceutical distributor.
CVS Health (CVS) operates one of the largest domestic retail pharmacy networks with more than 9,700 locations and is also a leading provider of pharmacy benefits management (PBM) services.
The PBM business is challenged, but with more than a billion adjusted claims expected to be processed in 2017, CVS has scale that gives it negotiating power to reduce branded drug prices for its customers.
While there is concern that Amazon will enter the retail pharma sales space, we don’t believe it is likely anytime soon, and we like that CVS offers numerous walk-in medical clinics and multiple client touch points as differentiators.
We also believe that CVS will benefit from growth in pharma product sales due to the aging of the U.S. population, with analysts looking for EPS to rise from $5.84 this year to $6.34 in 2018 to $6.83 in 2019.
CVS, a high-tax-rate payer, generates strong free cash flow which can be used to increase its dividend (the yield is currently 2.6%), buy back shares and fuel growth.
Physicians Realty Trust (DOC) is a small-cap healthcare REIT that acquires, owns and manages healthcare properties that are leased to physicians, hospitals and healthcare delivery systems and other healthcare providers.
Its properties are typically on a campus with a hospital or strategically located and affiliated with a hospital or physician organization.
With the stock off 14% after a recent share offering to raise money for additional property purchases in the competitive medical office building space, we see an attractive entry point to add healthcare exposure via a name outside of traditional pharma and medical devices.
With DOC growing rapidly, we like the expertise and experience of the management team with a proven track record of property acquisitions, as well as the continued focus on leveraging its physician and hospital relationships nationwide to invest in off-market assets that maximize returns to shareholders.
DOC has a solid balance sheet with strong liquidity and access to various sources of capital which should support meaningful growth in Funds From Operations.