2 junior healthcare stocks to buy

Analyst Alp Erdogan says that in 2019, capital that bloated the 2018 prices of cryptocurrencies, cannabis stocks and blockchain technology generally will shift toward value stocks with better defensive characteristics. “They might be more boring, but that’s the way to make money in the long run,” he says.

Alp Erdogan picks two healthcare stocks for 2019. One for its technology and
one for its growing home-care market.

Market volatility in 2018 reminded many investors that what goes up must come down, but Gravitas Financial Inc. senior investment analyst Alp Erdogan insists: “There’s a lot of good opportunities out there. Prices have really come down.”

Mr. Erdogan, based in Toronto, is responsible for special situations research. Gravitas is geared toward identifying small (market capitalizations of $500 million or less), undervalued companies overlooked by the market because they operate in an unfashionable sector or lack analyst coverage.

Beginning his career at Raymond James Financial, Mr. Erdogan says he joined Gravitas in 2018 due to his own interest in small-cap stocks with under-the-radar names.

Looking back at the last year, the analyst remarks: “The last few months have been quite volatile,” and he adds, “We can expect the market to be volatile on a go-forward basis.”

In October and November, the mispricing of stocks across the market became evident, leading to tumbles that have continued to the present, he argues.

Buybacks drove 2018 earnings improvements

“If you look at 2018 . . . a lot of it has been driven by the FAANG names,” says Mr. Erdogan. Outside of those companies, performance was middling and economic drivers such as the US corporate tax package passed in late 2017 could be slowing down. “Most US earnings improvement was based on share buybacks.”

Mr. Erdogan says of the federal Liberals’ raft of business tax reforms and incentives unveiled in November and designed as a response to the US tax package: “From what I’ve seen, I don’t think it’s going to have the magnitude that it had in the US.” However, the tax breaks could have the limited impact of making Canadian companies more competitive. The analyst predicts that 2019 will be a “kind of chugging along year. We’re going to tread water.”

Interest will shift to healthcare and technology

The analyst asserts that in 2019, capital that bloated the prices of cryptocurrencies, cannabis stocks and blockchain technology generally will shift toward value stock picks with better defensive characteristics. “They might be more boring, but that’s the way to make money in the long run,” he says.

While cannabis stocks may enjoy more secular growth in the first half of 2019, Mr. Erdogan predicts that by the second half of 2019 and into 2020, growth-minded investments in smaller-cap companies will drift toward healthcare stocks and technology stocks.

Since 2018 volatility has eroded share prices across the board, the analyst says. “We see attractive risk-reward profiles going forward” for worthwhile companies in those sectors.

“Now is a good time to accumulate positions in these names.” That said, he cautions that in 2019, it will pay to “be nimble”.

2 healthcare stocks are ‘best buys’

One of Mr. Erdogan’s ‘best buys’, Vancouver-based WELL Health Technologies Corp. (TSXV—WELL) perfectly fits his prescription for imminent gains as both a healthcare stock and a technology stock.

With an arguably ‘micro’ market cap of just about $36 million, WELL Health is working to digitize the “whole patient-doctor relationship,” explains the analyst. This consists of finding “synergistic” applications for patient data.

The company owns a portfolio of 90 medical clinics. While those clinics already employ 360 health professionals and serve 600,000 patients, Mr. Erdogan argues that the real driver of its value this year will come from licensing its intellectual property and medical applications to other medical healthcare providers.

The company is already attracting institutional buzz, having received a large capital injection from Horizons Ventures, owned by Hong Kong billionaire Li Ka-shing, in May 2018. At the moment, it boasts zero debt and $7 million in cash. “In case the market takes a dive, it has some wiggle room,” says Mr. Erdogan.

It also trades at a discount to peers in terms of enterprise-value-to-sales. “I believe the shares will rate a much higher valuation in 2019,” says the analyst, as WELL Health ramps up its licensing efforts and raises margins.

Mr. Erdogan’s second ‘best buy’ pick, healthcare stock Nova Leap Health Corp. (TSXV—NLH), is a Dartmouth, NS-based homecare and healthcare operator. With a slightly larger but still small market capitalization of $70 million, Nova holds a portfolio of seven companies and properties providing services spread across four US states (New Hampshire, Rhode Island, Massachusetts, and Vermont) and Nova Scotia.

“We see the health and homecare space . . . as one of the fastest-growing in North America,” says the analyst. At present, the US homecare market is worth US$89 billion but is also highly fragmented (no player holds more than a five per cent market share).

He praises Nova Leap’s “excellent” capital allocation as well, noting that all of its acquisitions have added to the bottom line and overall cost-efficiency.

(Both WELL Health and Nova Leap are part of Gravitas’ regular coverage.)

This is an edited version of an article that was originally published for subscribers in the January 4, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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