Seeing a wall of red numbers in your brokerage account is usually a terrifying experience, but it doesn’t necessarily mean you’re a bad investor. Market corrections are a fact of life, and almost everyone’s portfolio is affected. In my opinion, one of the things that separates skilled investors from the less skilled is theirs reaction to a sale. And right now, the market could be in full swing in some sectors.
Some people may panic, while others will see it as an opportunity to buy stocks they have seen. In that regard, I have been seeing a group of three health actions that are currently on an expensive side. All three thrived in the chaos of 2020 and all three are likely to be backed by long-term trends in the advancing economy. But, two of the three have fallen so far, which means it could be approaching points of purchase. If the market sinks, buying shares in any of the three trio could be a big move.
1. Surgical STAAR
Have you heard of glasses and contacts (and you may even be wearing a pair right now), but did you know that there are corrective lenses that can be worn? inside your eye? STAAR Surgical Company (NASDAQ: STAA) does exactly that: implantable lenses for eye surgery. And business is booming. In the fourth quarter, it reported that net sales had increased 18% year-on-year. Likewise, its gross margin grew a couple of percentage points to 74.6% in 2020 and its future is equally bright. The company expects its total addressable market (TAM) to double nearly 35 million people representing $ 6 billion in sales to 70 million people over the next 30 years, and is already in a position to continue to capture a significant share of this growth.
So why should investors wait for the sale before buying? In short, because stocks can be extremely overvalued based on their price / profit ratio (P / E). STAAR’s final P / E ratio is just over 820, which is more than double the average of 317 for the healthcare industry. The ratio doesn’t necessarily have to go down to the average level for stocks to be a good deal, but even a small step down could make it a more attractive buy.
D’Abiomed (NASDAQ: ABMD) heart pumps for cardiac surgery fill a key niche in the surgical tools market and also help patients recover more quickly from serious interventions. Abiomed pump treatment saves 80% of people suffering from heart attacks, which is a big improvement compared to the 50% survival rate without it. Similarly, while the action (hopefully) will not be the not more which keeps your portfolio in good health, could give you much needed support for recovery or growth. In 2020, the company’s total revenue increased 9% to $ 841 million. Abiomed’s operating income and cash holdings are steadily increasing year after year, as more and more clinics are certified to use their pumps in the United States and, with $ 651 million in cash, has a lot of gas to the repository to maintain growth by developing new pumps and other life-saving heart interventions.
Despite its last somewhat weak profit report and the quiet market reaction, I still think the shares are more expensive. Quarterly earnings growth was down 10.6% year-on-year, driven by higher revenue costs and also higher selling expenses. But Abiomed is still priced as a fast-growing stock. Its final price-to-sales (P / S) ratio is about 17, well above its industry average of 6.94. It will likely increase earnings steadily again sometime this year, which means that in the event of a market crash, the shares will have a discount.
After the pandemic forced people to stay home, Teladoc Health (NYSE: TDOC) became a well-known name thanks to its easy-to-use, high-access telehealth services. The company sells subscriptions to insurance companies, giving its customers access to their telehealth doctors. Its paid membership base, a strong correlator of its recurring revenue, grew 41% in the U.S. during 2020, reaching 51.8 million subscribers. Undoubtedly, this was a factor that helped its annual revenue nearly double to $ 1.09 billion in the same period.
But I think Teladoc is still a bit pricey. It currently trades at an advanced P / S ratio of 14, largely as a result of last year’s meteoric growth. The stocks will face the short-term wind as investors recycle their funds from technology-intensive growth stocks to commodities and other sectors. Teladoc is not profitable and management does not expect to grow its members or revenue so quickly in 2021. These two elements are problems in the context of a flight to value, if it occurs. As the pandemic begins to subside, people will be more willing to go for face-to-face visits with their doctors, potentially reducing the demand for telehealth. Still, in the long run, its higher level of convenience makes telehealth stay here to stay, and Teladoc made such significant forays last year that it’s hard to see its brand power go down any time soon. Therefore, I will try to recover some actions if there is a correction that leaves you with a (relative) discount to where it is today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We are motley! Questioning an investment thesis (even one’s own) helps us reflect critically on investment and make decisions that help us be smarter, happier, and richer.