SunTrust Has 5 Sizzling Health Care High-Conviction Picks for Q4

This year, for the first time in many years, active managers are outperforming index funds, and that should be a loud wake-up call to passive investors. After a more than 10-year bull market, the bull is tired. Although central banks are still providing a liquidity security blanket, and interest rates remain at generational lows, this looks to many on Wall Street like the proverbial “stock pickers” market.

So, many portfolio managers and investors are looking for stocks that can outperform into year’s end and generate a little finish-line alpha. The analysts at SunTrust Robinson Humphrey put together a list of 33 stocks ideas that they feel will outperform into year-end 2019.

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SunTrust noted this when discussing the high-conviction equity ideas:

Many of our institutional clients are looking for help as they screen for stocks that are poised to outperform into year end, with characteristics or catalysts that will likely become apparent to the market in the fourth quarter. Furthermore, with the recent increased volatility, partly driven by the “great rotation” – out of momentum/growth into value/ laggard names – we are receiving more requests from money managers for value ideas which have lagged, hence the timeliness of this effort.

Today we look at the health care stocks that the analysts focused on, and five in the report make good sense for accounts with a degree of risk tolerance. All are rated Buy at SunTrust.

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Axsome Therapeutics

This stock was ripped recently and may be offering a stellar entry point. Axsome Therapeutics Inc. (NASDAQ: AXSM) is a clinical-stage biopharmaceutical company engaged in developing novel therapies for the management of central nervous system disorders. Its product candidates include AXS-02 and AXS-06, which are developing for multiple indications.

To date, approximately 65% of the targeted number of patients have been randomized into the ADVANCE-1 Phase 2/3 trial of AXS-05 in agitation associated with Alzheimer’s disease. Axsome continues to anticipate topline results from the ADVANCE-1 trial in the first half of 2020. Also, to date, more than 80% of the targeted number of patients have been randomized into the MOMENTUM Phase 3 trial of AXS-07 in the acute treatment of migraine.

The SunTrust report said this:

Our thesis is based on the company’s lead asset AXS-05 currently in Phase 3 development for Major Depressive Disorder (MDD), Treatment Resistant Depression (TRD), and Alzheimer’s Disease Agitation (AD Agitation). Despite de-risking data points, we still view Axsome as undervalued based; on $3.5 billion a competitor paid for a similar drug in 2014 for AD Agitation, a large total addressable market opportunity, and AXS-05’s potential in depression. We anticipate mid to late stage clinical readouts over the next 12 to 18 months to continue to create shareholder value.

The SunTrust price target for the shares is a whopping $50. The Wall Street consensus target is $36.83, and shares closed Monday’s trading at $18.23.

Bausch Health

This familiar name is a company that offers some stability and very solid upside potential. Bausch Health Companies Inc. (NYSE: BHC) is a global company focused on health care products ranging from pharmaceuticals (brands + generics), medical devices (contact lenses) and over-the-counter medicines.

The company is focused on developing and commercializing products in three therapeutic areas: eye care, gastroenterology and dermatology. The analysts have some concerns, but overall they like the company and the potential:

Despite the heavy debt load, we believe management is doing the right things to strengthen the business, including investing behind core growth franchises (particularly GI and eye care), reducing legal liabilities, and strengthening the balance sheet. The company has also begun an important pivot to offense, demonstrating the ability and willingness to make bolt-on acquisitions. If the company continues to execute, we see the potential for significant upside for the stock over the next 12+ months, although the debt burden will make it tough for the stock to be owned by the masses.

SunTrust has a $30 price target, while the consensus target is $29.72. The shares were last seen trading at $19.29 apiece.

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While somewhat under the radar, this stock has huge upside to the SunTrust target. Change Healthcare Inc. (NASDAQ: CHNG) is one of the largest health information technology companies in the United States, with a focus on both technology and tech-enabled services.

The company’s claims processing business (within its Network segment) processes more than 14 billion claims annually, encompassing more than $1 trillion of total health care spend. Change Healthcare works with virtually every major health payer and provider in the country through its broad suite of services.

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The stock has not performed well since its summer IPO, giving investors a great entry point. The analysts said this:

We think reversal of recent market trends (market favoring high growth stocks) could result in rotation out of high growth into more “value oriented” names. This would favor the company, in our view, as we view it as a highly attractive value company; with a financial profile that demonstrates highly visible revenue, low client concentration, a long term growth profile in the low- to mid- single digits, and associated high EBITDA margins and strong free cash flow characteristics.

The $21 SunTrust target price compares to an $18.40 consensus target. The stock ended Monday at $12.09 per share.

HealthEquity

This stock has also taken a hit this year and offers a very good entry point. HealthEquity Inc. (NASDAQ: HQY) provides a range of solutions for managing health care accounts — Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs) — for health plans, insurance companies and third-party administrators.

Health Equity is engaged in technology-enabled services platforms that allow consumers to make health care saving and spending decisions. Its platform provides an ecosystem in which consumers can access their tax-advantaged health care savings, compare treatment options and pricing, evaluate and pay health care bills, receive personalized benefit and clinical information, earn wellness incentives and make educated investment choices to help in their tax-advantaged health care savings.

The company’s products and services include a health care saving and spending platform, health savings accounts, investment advisory services, reimbursement arrangements and health care incentives.

SunTrust sees big growth in the area:

We view HealthEquity as a compelling opportunity to capitalize on what we see as inevitable growth in health savings accounts in the U.S. and a high-growth, high-visibility model. In our opinion, HealthEquity is differentiated by its technology enabled platform, positioning HealthEquity to win market share and outperform the market as widespread HSA adoption plays out. We think recently acquired WageWorks should enable EVH to enhances it market share-grabbing prowess.

The analysts have set an $80 price objective. The consensus target price is $78.33, but shares closed way below both levels on Monday at $53.86.

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La Jolla Pharmaceuticals

This biopharmaceutical company has been mentioned as a possible takeover candidate and the stock has been battered over the past six months. La Jolla Pharmaceuticals Co. (NASDAQ: LJPC) engages in the discovery, development and commercialization of therapies intended to significantly improve outcomes in patients suffering from life-threatening diseases.

Giapreza (angiotensin II), formerly known as LJPC-501, was approved by the U.S. Food and Drug Administration (FDA) on December 21, 2017, as a vasoconstrictor indicated to increase blood pressure in adults with septic or other distributive shock.

The company announced in late summer that the European Commission has approved Giapreza for the treatment of refractory hypo-tension in adults with septic or other distributive shock. While the news is positive, SunTrust thinks additional upside should come if the company matches up with a partner for its EU commercialization efforts, and the report said this:

We continue to view Giapreza as a significantly under-appreciated asset but also see additional upside from LJPC-401 for Hereditary Hemochromatosis (HH) with the release of full Phase 2 HH data expected by year end 2019 and from LJPC-401 for Beta-Thalassemia with expected upside to revenues in mid 2020.

SunTrust has a whopping $20 price target. The consensus target is $19.80, and shares closed most recently at $8.73.

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These five health care stocks offer more aggressive accounts some great entry points and sizable upside to their respective price targets. With earnings reports about to come pouring in, it may make sense to buy partial positions now and wait for the results.