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Health Care Offers a Dose of Visibility

Chris Aregood, Friess Associates believes the health care sector provides a favorable mix of visible growth potential. As we all know, demand for health care is persistent.

When it comes to stocks, uncertainty is certain. Certain times feel more uncertain than others, but no one can ever claim to know what will happen from one day to the next.

We try to inject as much predictability into what we do as we can by consistently focusing on earnings. We believe earnings determine stock prices. Still, that connection is only important if we can get the earnings part right, which is why we try to isolate companies with earnings growth prospects that provide some degree of visibility.

Every sector and each company in it come with their own mix of shifting challenges related to visibility. Despite pronounced regulatory uncertainty in recent years, we believe the health care sector provides a favorable mix of visible growth potential. As we all know, demand for health care is persistent.

The secular trends behind the push for health reform – an aging population with greater health demands, skyrocketing costs and limited government resources – will remain in place regardless of how the system adapts going forward. In particular, confidence should continue to increase in companies with unique cost advantages, innovative quality-of-care improvements and new treatment options.

With almost 20 million members on its platform across 10,000-plus clients and more than one million annual visits, Teladoc (NYSE: TDOC) is the market leader in providing fast and inexpensive physician interactions via telehealth. Given its market share lead in this category and the recurring nature of its revenue, the company starts any given year with the majority of its revenue already locked up. The disruptive nature of the company’s technology gives us confidence that its double-digit organic growth rate is sustainable.

Tabula Rasa Healthcare (Nasdaq: TRHC) is a medication risk mitigation software and pharmacy service provider to health care organizations. In addition to its own recurring revenue stream and high customer retention rates, we believe the company is positioned for success because it addresses critical yet highly unmet safety concerns. The company’s unique ability to quickly identify drug interactions is becoming more important as the percentage of the population taking five or more medications increases and adverse drug events become more dangerous and expensive.

Vocera Communications (NYSE: VCRA) also caters to a unique and growing need. The company’s communications platform includes hands-free voice communication, secure text messaging and patient engagement tools that can be integrated into existing clinical systems. The Joint Commission, a nonprofit that accredits hospitals and health care organizations, estimates that 69 percent of accidental deaths and serious injuries in hospitals are caused by communication breakdowns, highlighting the critical function of communications systems.

Visibility into the company’s rapid growth prospects is aided by the fact that more than half of all hospitals are still using antiquated paging and wireless systems to communicate.

Biotechnology companies have accounted for an oversized portion of gains in the health-care sector. As the population ages globally, a push is being made toward a host of life-extending treatments. The Food and Drug Administration (FDA) is being more accommodative in its approval process while allowing for greater efficacy and expanding usage of existing medications. At the same time, improved knowledge about genetics is spurring new drug development for various diseases.

It’s difficult for us to buy a start-up biotechnology company with its visibility tied to the binary outcome of one particular clinical trial. It’s more likely we find diversified companies like Agilent Technologies (NYSE: A) and Thermo Fisher Scientific (NYSE: TMO), which both provide tools and services across the fast-growing biotechnology space.

Animal health care is another place within the sector that offers a backdrop of high visibility because of strong demand trends for companion animal care and the unregulated nature of the business. Zoetis (NYSE: ZTS) generates a diversified revenue stream across the livestock and the companion animal markets. New products, specifically aimed at the companion animal market, continue to perform well. The company’s international expansion and investments in research and development will continue to make it less dependent on any one product or economy.

Every year brings opportunities and challenges, most of which are impossible to foresee ahead of time. Our experience tells us that companies that offer visibility because of their own internal fundamental strengths will recognize related opportunities and mitigate hazards best. We remain focused on uncovering innovative companies with what we believe are uncommon outlooks for earnings growth.

Editor’s Note: Friess Associates is a growth-oriented investment manager driven by individual-company research. Friess Associates offers its growth-equity services through mutual funds that span the market-cap spectrum. The introduction of Friess Small Cap Growth Fund in May 2017 completed the market-cap menu, giving investors small-cap, mid-cap, large-cap and all-cap options to access the firm’s research-driven investment approach. For more information on the mutual funds, visit www.friess.com.

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