By Gustav Andersson
The healthcare sector has always been a crucial part of the global economy, and with the ongoing advancements in technology and medical research, it continues to offer attractive investment opportunities. In this blog post, we will explore the top 10 growth stocks in the healthcare sector based on a quantitative analysis of key financial metrics.
The TL;DR (Too Long; Didn’t Read)
- InMode Ltd. (INMD) – Medical Devices – Total Score: 5.437
- Molina Healthcare, Inc. (MOH) – Healthcare Plans – Total Score: 5.351
- Progyny, Inc. (PGNY) – Health Information Services – Total Score: 4.36
- Johnson & Johnson (JNJ) – Drug Manufacturers General – Total Score: 4.295
- Semler Scientific, Inc. (SMLR) – Medical Devices – Total Score: 3.701
Methodology:
To determine the top growth stocks, we looked at a dataset with various financial metrics, including revenue growth, EPS growth, ROE, ROA, PE ratio, forward PE, and analyst upside. We used the Z-score method to give each metric a score based on how it compared to the average of all the companies in the healthcare sector.
Think of the Z-score as a way to see how well a company is doing compared to its competitors. It tells us how far above or below the average a company’s metric is, in terms of standard deviations. A positive Z-score means the company is performing better than average, while a negative Z-score means it’s below average.
For example, if a company’s revenue growth has a Z-score of 1.5, it means that the company’s revenue growth is 1.5 standard deviations above the mean of all the companies in the dataset. This suggests that the company is outperforming its peers in terms of revenue growth.
We calculated the Z-score for each financial metric and every company in the dataset. Then, we gave each company a score based on its Z-score, with higher scores going to companies with better performance compared to their competitors. Finally, we added up the scores for each metric to get a total score for each company. The total scores helped us rank the stocks and list the all the US publicly traded healthcare stocks.
Before we dive into the score table for the Healthcare Sector.
The analysis is simplified and is an analysis, not an answer key, and will therefore, sooner or later, be incorrect on one, several, or all points. Details and the basis for the analysis are not presented, including the omission of details that lead to the conclusion.
A Notable Observation: The Absence of P/E Ratios in Many Healthcare Stocks
While analyzing the healthcare sector, it’s important to note that many companies lack a P/E ratio. This is because a significant number of healthcare stocks, particularly those in the biotech and pharmaceutical industries, are highly speculative and may not generate any revenue or profits in their early stages.
These companies often focus on research and development, clinical trials, and regulatory approvals, which can take years and require substantial capital investment. During this period, they may operate at a loss, resulting in negative earnings and the absence of a P/E ratio.
You are essentially betting on the future success of the company’s products or services, hoping that they will eventually gain market approval and generate significant revenue. However, this also means that investing in these stocks carries a higher level of risk, as there is no guarantee that their products will be successful or that they will ever become profitable.
When considering investing in healthcare stocks without a P/E ratio like in this list, it’s crucial to conduct thorough research on the company’s pipeline, management team, financial stability, and potential market for their products. Investors should also be prepared for high volatility and the possibility of significant losses.
You should be aware that many healthcare companies, particularly in the biotech and pharmaceutical industries, frequently engage in stock dilution through secondary offerings. This practice involves issuing new shares to raise additional capital, which can be necessary to fund ongoing research and development efforts.
However, this dilution can also be a red flag, as it may indicate that the company is struggling to generate sufficient revenue or secure other forms of financing. Investors should keep a watchful eye on companies that repeatedly resort to secondary offerings, as it can erode the value of existing shares and potentially impact investor confidence.
Top 10 Growth Stocks in the Healthcare sector:
- InMode Ltd. (INMD): With a total score of 5.437, InMode Ltd. tops the list. The company’s strong ROE (24.2%) and ROA (22.1%) indicate efficient use of resources and profitability.
- Molina Healthcare, Inc. (MOH): Molina Healthcare ranks second with a total score of 5.351. The company’s impressive revenue growth (10.82%) and EPS growth (25.39%) showcase its strong financial performance.
- Progyny, Inc. (PGNY): Progyny secures the third spot with a total score of 4.36. The company’s revenue growth (26.94%) and EPS growth (44.19%) demonstrate its potential for future growth.
- Johnson & Johnson (JNJ): This well-established healthcare giant ranks fourth with a total score of 4.295. Johnson & Johnson’s strong ROE (54.0%) and ROA (22.1%) highlight its financial stability and efficiency.
- Semler Scientific, Inc. (SMLR): Semler Scientific ranks fifth with a total score of 3.701. The company’s high ROE (30.4%) and ROA (27.4%) indicate its strong profitability.
- DocGo Inc. (DCGO): DocGo secures the sixth position with a total score of 3.617. The company’s impressive revenue growth (61.46%) suggests significant potential for expansion.
- Baxter International Inc. (BAX): Baxter International ranks seventh with a total score of 3.546. The company’s high ROE (35.0%) and attractive forward PE (11.225) make it a promising investment option.
- Novartis AG (NVS): Novartis ranks eighth with a total score of 3.543. The company’s strong EPS growth (127.08%) and ROE (34.6%) indicate its financial stability and growth potential.
- SCYNEXIS, Inc. (SCYX): SCYNEXIS ranks ninth with a total score of 3.503. The company’s exceptional revenue growth (2436.77%) and high ROE (122.0%) make it an attractive choice for growth-oriented investors.
- ResMed Inc. (RMD): ResMed rounds off the top 10 with a total score of 3.405. The company’s steady revenue growth (14.16%) and high ROE (21.9%) demonstrate its financial strength.
The Z-score method compares each company’s metrics to the average of all companies in the dataset, allowing for a standardized comparison across different metrics and companies. By considering multiple factors such as revenue growth, EPS growth, ROE, ROA, PE ratio, forward PE, and analyst upside, the methodology provides a comprehensive evaluation of each company’s growth potential.
This approach ensures that the ranking is not solely based on a single metric, such as revenue growth or brand recognition, which could potentially favor only established companies. Instead, the methodology takes into account a range of financial indicators that are relevant to both established and emerging companies. and this is exactly the data I want to share with you, to give you an infomration upperhand or level the said information advantage with established institutions.
However: Always do your own research before investing.
Readers should keep in mind that this analysis is based on historical financial data and should not be considered as investment advice. It is essential for readers to conduct their own thorough research and consult with financial professionals before making any investment decisions. The information provided in this article is for educational and informational purposes only and should not be relied upon as a sole basis for investment choices.
The blog comments:
Now, we want to hear from you! We’d love to know your thoughts on this approach to analyzing the healthcare sector. Do you find this methodology valuable in assessing growth potential? Have you used similar techniques in your own investment research? What other factors do you consider when evaluating companies in the healthcare industry?