3 Magic Formula Health Care Stock Picks
- By Alberto Abaterusso
If you want to enhance your likelihood to beat the market, one method is to select stocks that rank highly according to the "Magic Formula" criteria.
Designed by Joel Greenblatt (Trades, Portfolio), a prominent value investor and author of "The Little Book That Beats the Market," the Magic Formula ranks stocks based on a specific array of technical criteria, the most important being the earnings yield and the return on capital.
In Greenblatt's book, these two financial ratios are built a little differently than normal. Greenblatt computes the earnings yield as earnings before interest and taxes (Ebit) divided by the enterprise value, while the return on capital is Ebit divided by net fixed assets and working capital.
In addition to high values in these two financial indicators, Magic Formula stocks are further narrowed down to be U.S. stocks with a market capitalization above $100 million, because businesses that do not match these criteria have different capital structures. The Magic Formula also excludes financial and utility businesses for similar reasons.
Below are three of my stock picks in the health care sector that rank highly on the GuruFocus Magic Formula screener, a screener based on the Magic Formula criteria.
BioDelivery Sciences International Inc
The first magic formula stock to consider is BioDelivery Sciences International Inc (NASDAQ:BDSI), a Raleigh, North Carolina-based biotech company engaging in the advancement and commercialization of specialty pharmaceutical treatments for several illnesses.
The stock was trading at $3.42 per share at close on April 16 for a market capitalization of $344.95 million. As of December, it had an earnings yield of 8.40% and a return on capital of 278.33%.
BioDelivery Sciences International's earnings yield ranks better than 96% of 1,367 companies operating in the biotechnology industry, while its return on capital ratio ranks better than 98% of competitors.
The share price has fallen by nearly 18% over the past year to trade about 19.53% below the midpoint of the 52-week range of $3.04 to $5.45.
Currently, BioDelivery Sciences International Inc does not pay dividends.
GuruFocus has assigned a score of 5 out of 10 for the company's financial strength and 3 out of 10 for its profitability.
On Wall Street, the stock has a median recommendation rating of buy and an average target price of $7.08 per share.
Blueprint Medicines Corp
The second magic formula stock is Blueprint Medicines Corp (NASDAQ:BPMC), a Cambridge, Massachusetts-based biotechnology developer of therapies for cancer and hematologic disorders.
The stock was trading at $95.20 on April 16 for a market capitalization of $5.52 billion. Currently, the earnings yield is 6.52% and the return on capital is 289.08%.
Blueprint Medicines Corp's earnings yield ranks higher than 94.51% of 1,367 companies operating in the biotechnology industry, while the return on capital ratio ranks better than 97.68% of competitors.
The share price has risen by nearly 35% over the past year to trade about 4.83% above the midpoint of the 52-week range of $56 to $125.61.
Currently, Blueprint Medicines Corp does not pay dividends.
GuruFocus has assigned a score of 7 out of 10 for the company's financial strength and 3 out of 10 for its profitability.
On Wall Street, the stock has a median recommendation rating of overweight and an average target price of $117.62 per share.
Fulgent Genetics Inc
The third magic formula stock to consier is Fulgent Genetics Inc (NASDAQ:FLGT), a Temple City, California-based provider of genetic testing services.
The stock was trading at $90.50 per share at close on April 16 for a market capitalization of $2.62 billion. As of December 2020 quarter, it has an earnings yield of 24.51% and a return on capital ratio of 887.75%.
Fulgent Genetics Inc's earnings yield ranks higher than 94% of 244 companies operating in the medical diagnostics and research industry, while the return on capital ratio ranks better than 99% of competitors.
The share price has risen by nearly 495% over the past year to trade about 9.54% above the midpoint of the 52-week range of $8.36 to $189.89.
Currently, Fulgent Genetics Inc does not pay dividends.
GuruFocus has assigned a score of 7 out of 10 for the company's financial strength and 3 out of 10 for its profitability.
On Wall Street, the stock has a median recommendation rating of hold and an average target price of $107 per share.
Disclosure: I have no positions in any securities mentioned in this article.
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This article first appeared on GuruFocus.
