Healthcare Stocks Are Too Expensive to Buy

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One of the hottest sectors in the market today is healthcare. It doesn’t take a genius to understand that the youngest of the baby boomer generation are now into their 50s, and the leading edge is staring at 80 as health care needs are rising.

At the same time, the industry is constantly discovering new ways to extend life spans and improve our quality of life. There are new devices, procedures and drugs being developed every day that deal with medical problems once feared insurmountable.

healthcare stocks

The advances are breathtaking when you consider the changes I have seen in just my lifetime. The pace of breakthroughs seems to be accelerating, as more research money is spent to develop drugs and technology — and the potential profits are enormous. Healthcare stocks like drug companies, biotechs and device companies have been among the market leaders the past several years.

Virtually every private equity executive and hedge fund manager has said that they consider healthcare to be one of the best sectors to buy going forward. And it’s difficult to disagree as we watch healthcare stocks like Johnson & Johnson (JNJ) and Merck (MRK) outperform the S&P 500 so far this year.

While I am in agreement with the idea and sentiment, there’s just one little problem. Mark Twain perhaps put it best when he said, “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” Everybody likes healthcare stocks right now. The story makes enormous sense and it is an easy sell. I have found over the years that “everybody” may be right about the theme … but very, very wrong about the price.

I would love to own healthcare stocks, and if the market ever does correct or crash I will most certainly be buying them at more attractive multiples. At the moment, however, there literally are no healthcare stocks trading at bargain levels. Using my preferred metric of price-to-book-value, the only cheap stocks on an asset basis are the busted baby biotechs, and if you do not have an advanced degree in biotechnology you have no business messing around with those cash-burning companies at all.

Just in case I was be overly strict in my approach, I looked at the sector using the favorite metrics of private equity investors. When I searched for healthcare companies that trade for an Enterprise Value to EBITDA ratio of less than five, I once again came up completely empty. I got the same result for searching for medical companies that traded for less than five times free cash flow. I even tried what I consider the least reliable valuation measure and searched for medical firms trading for single-digit PE ratios. I go the same result, with zero cheap stocks on this measure as well.

I would love to own healthcare. It’s easy to see that the industry should do well in the future. What is less clear is how paying high valuations will allow investors to benefit form that success. In my experience, even the best ideas can trade at too high a price, and right now I think that is the case with healthcare stocks.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/healthcare-stocks-expensive/.

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