We are still in the seasonally bearish worst six months, the time of year characterized by the popular saying to “sell in May and go away.” We’ve seen that the six months from the beginning of May through the end of October is a period of below average returns. Assuming you held stocks only during the best six months, from November through April, your average annual gain would be 5.2%, equal to all of the Dow’s gains over the past 116 years. Over the worst six months, the Dow Jones Industrial Average lost an average of 0.3% a year.
Losses for the worst six months resulted from negative returns in just a few years. Stocks were actually up 60% of the time in the worst six months, close to the winning percentage of 69.3% for the best six months. Just a few years actually explain all of the performance in both time periods. The best six months is entirely explained by bull markets in 17 of the 116 years. For the worst six months, the worst year, 2008, explains why this six-month period shows a loss. Excluding that year, we have an average annual gain of 3.6% in the worst six months.
This leaves us with a problem – even in the worst six months, stocks go up most of the time. Missing the gains means we fail to meet our primary investment goal which is to maximize wealth. If we sit on the sidelines earning nothing for half the year we are certainly not maximizing wealth.
Sam Stovall, a highly respected researcher at Standard & Poor’s, addressed this problem and found that defensive sectors, stocks investors turn to when they are concerned about risk, outperform broad stock market averages during the worst six months. For specific investments, he advised looking at the consumer staple and healthcare sectors. His research indicated stocks in these sectors could provide market-beating gains even during the worst six months.
This week, we look at health care stocks that provide income and are priced below $10 a share.
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Digirad Corporation (Nasdaq: DRAD) makes and services diagnostic imaging solutions for medical facilities and physicians’ offices. The company provides equipment for nuclear cardiology, ultrasound, echocardiography, vascular imaging, and neuropathy diagnostics, along with equipment rental and personnel staffing.
Two recent acquisitions are expected to help the company more than double in size this year. Revenue is expected to reach $128 million this year, up from $61 million in 2015. Earnings per share (EPS) are expected to grow to $0.32 from $0.17 last year. In 2017, analysts expect the company to stabilize with revenue and earnings comparable to this year. In the long run, growth in EPS averaging 16% a year is expected.
After the acquisitions, which included a mobile healthcare services division and the exclusive right to sell and service Philips Medical Equipment in the upper Midwest, DRAD has a presence in 42 states. The company could grow its business from its current footprint or acquire small competitors. DRAD has a reasonable level of debt and cash flow more than covers current debt service costs and the company’s dividend. It should be possible to issue more debt to fund acquisitions.
DRAD began paying a dividend in 2013 and management has indicated they intend to continue doing so. At the current price, DRAD offers a yield of 3.8%. Small cap stocks rarely pay dividends but the average yield among those that do is about 3%. To yield 3%, DRAD would need to trade at $6.67 a share, just below the 52-week high and more than 25% above the current price. This is a reasonable and attainable 12-month price target.
Action to take: DRAD is a buy at the market price. Consider a stop at $4.50. The price target is $6.67.
Nature’s Sunshine Products Inc. (Nasdaq: NATR) offers a 3.9% yield. The company makes and sells nutritional and personal care products worldwide under the Nature’s Sunshine Products and Synergy WorldWide brands through a sales force of independent managers and distributors. Annual sales have topped $320 million in each of the past seven years and the company has been profitable in each of those years. EPS for the past twelve months were $0.58, more than enough to cover the $0.40 a year dividend. With safe income of 3.9%, NATR offers a high level of safe income.
The chart below shows a recent stochastic buy signal. In the past, these signals have been profitable with the most recent signal preceding a 30% gain.
Action to take: NATR is a buy at $10.40 or higher. Consider a stop at $9. The initial price target is $13.28.
PDL BioPharma, Inc. (Nasdaq: PDLI) manages a portfolio of patents and royalty assets in the United States and Europe. The company is involved in the discovery of a new generation of targeted treatments for cancer and immunologic diseases. PDL BioPharma, Inc. has license agreements with various biotechnology and pharmaceutical companies, as well as acquires royalty and other assets. The stock rewards investors with a 6.2% dividend yield.
Late last year, the stock fell below its book value. This allows investors to buy PDLI’s assets at a discount.
The income appears to be safe. Cash flow from operations has consistently been positive and exceeds the dividend payouts by 200% or more for the past five years.
Action to take: Buy PDLI on a break above $3.25. The initial price target is $4.24, the company’s book value. Consider a stop at $2.55.
Diversicare Healthcare Services Inc. (Nasdaq: DVCR) offers a 2.7% dividend yield that could be appealing to long-term investors. The stock is thinly traded which means it is not suitable for many short-term traders. Average daily trading volume is about 2,500 shares but liquid stocks can be traded at low cost using limit orders. All stocks are quoted with bid and ask prices. A market order to buy is generally filled at the ask price which is higher than the bid. DVCR often trades with a spread, the difference between the bid and ask prices, of about $0.05. A limit order to buy near the bid price and a sell with a limit at the ask price will result in lower trading costs than market orders. DVCR has excellent long-term income potential and could be worth the additional effort of limit orders.
The company provides post-acute care services to skilled nursing center patients and residents primarily in the Southeast, Midwest, and Southwest United States. It operates 55 nursing centers with 6,060 licensed nursing beds. In the most recent quarter, the company reported a 79.3% occupancy rate, near its long-term average. The company expects to increase both the number of facilities it operates and the daily billing rates for each bed. These actions should increase revenue and earnings.
DVCR is potentially an undiscovered investment gem. The stock trades at a price-to-sales (P/S) ratio just one-eighth of the industry average. This makes the company potentially attractive to larger companies as an acquisition. Buyouts are often valued based on the enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio. DVCR’s EV-to-EBITDA ratio is about one-third the average. Fundamentals indicate the stock could gain 200% or more. The steep discount is at least partly due to the low average trading volume. Large fund managers are usually unable to trade in stocks like this. That can result in the stock trading at a discount to its peers.
The chart confirms the bullish outlook for the stock. DVCR has formed a base pattern over the past six months and momentum is now bullish indicating an upside resolution of the trading range is likely.
Action to take: Using a limit order, DVCR is a buy near the current market price. Consider an order at the ask price as long as that is below $8.60. Consider a stop at $6.44. The initial price target is $12.92.
These stocks could be among the best investments of the summer given the seasonal tendency for healthcare stocks to outperform at this time of year. Their income potential enhances the attractiveness of these fours stocks.