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The Top 5 New Buys of the Vanguard Health Care Fund

- By Sydnee Gatewood

The Vanguard Health Care Fund (Trades, Portfolio) disclosed 10 new positions in its fourth-quarter 2018 portfolio, which was released earlier this month.


Managed by Jean Hynes, the fund invests in a number of diverse health care-related stocks from around the world in order to achieve long-term capital appreciation. She picks stocks of companies that have high-quality balance sheets, strong management teams and the potential for new products that will contribute to generate above-average revenue and earnings growth.

Based on these criteria, the fund's top five new buys for the quarter were Edwards Lifesciences Corp. (EW), Align Technology Inc. (ALGN), Molina Healthcare Inc. (MOH), Daiichi Sankyo Co. Ltd. (TSE:4568) and Teladoc Health Inc. (TDOC).

Edwards Lifesciences

Having previously closed a position in Edwards Lifesciences in the first quarter of 2018, the fund opened a new 1.5 million-share stake for an average price of $151.35 per share. The stake was given 0.54% space in the equity portfolio.

The Irvine, California-based medical device company has a $31.57 billion market cap; its shares were trading around $169.29 on Thursday with a price-earnings ratio of 50.10, a price-book ratio of 11.26 and a price-sales ratio of 9.70.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced.

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Edwards Lifesciences' financial strength was rated 8 out of 10 by GuruFocus, driven by good interest coverage and a robust Altman Z-Score of 11.82, which indicates the company is in good fiscal standing. The company's profitability and growth scored a 9 out of 10 rating. In addition to operating margin expansion, the company is supported by strong returns and a moderate Piotroski F-Score of 6, which implies business conditions are stable. Despite having consistent earnings and revenue growth, the company's business predictability rank of four out of five stars is on watch. GuruFocus says companies with this rank typically see their stocks gain an average of 9.8% per year.

Of the gurus invested in Edwards Lifesciences, Frank Sands (Trades, Portfolio) has the largest position with 3.81% of outstanding shares. Other top guru shareholders include Pioneer Investments (Trades, Portfolio), David Rolfe (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), the Eaton Vance Worldwide Health Sciences Fund (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Ron Baron (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Mairs and Power (Trades, Portfolio).

Align Technology

Vanguard invested in 501,282 shares of Align for an average price of $248.56 per share, dedicating 0.25% of the equity portfolio to the position.

Headquartered in San, Jose, California, the company, which manufactures Invisalign braces and other medical devices, has a market cap of $20.71 billion; its shares were trading around $258.97 on Thursday with a price-earnings ratio of 52.74, a price-book ratio of 16.53 and a price-sales ratio of 10.71.

According to the Peter Lynch chart, the stock is overvalued.

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As a result of having no long-term debt and comfortable interest coverage, GuruFocus rated Align's financial strength 9 out of 10. In addition, the Altman Z-Score of 17.57 suggests the company is fiscally strong. The company's profitability and growth scored an 8 out of 10 rating, driven by strong margins and returns that outperform competitors, a high Piotroski F-Score of 7, which indicates operations are healthy, and a one-star business predictability rank. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per year.

With 4.11% of outstanding shares, Sands is the company's largest guru shareholder. Jim Simons (Trades, Portfolio)' Renaissance Technologies, Andreas Halvorsen (Trades, Portfolio), Baron, Pioneer, Ken Fisher (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Mariko Gordon (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) also own the stock.

Molina Healthcare

Hynes picked up 762,800 shares of Molina Healthcare for an average price of $130.50 per share, allocating 0.21% of the equity portfolio to the holding.

The managed care company, which is based in Long Beach, California, has an $8.41 billion market cap; its shares were trading around $134.63 on Thursday with a price-earnings ratio of 12.76, a price-book ratio of 5.11 and a price-sales ratio of 0.49.

Based on the Peter Lynch chart, the stock appears to be undervalued.

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Molina's financial strength was rated 7 out of 10 by GuruFocus. Although the company's revenue per share has declined over the past 12 months, it is supported by adequate interest coverage and a solid Altman Z-Score of 4.67. The company's profitability and growth scored a 6 out of 10 rating, boosted by a moderate Piotroski F-Score of 5 and a one-star business predictability rank. Although its operating margin is expanding, it still underperforms 81% of industry peers.

Simons' firm is the company's largest guru shareholder with a 6.39% stake. Pioneer, Jeremy Grantham (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) also have positions in the stock.

Daiichi Sankyo

After divesting Daiichi Sakyo from the portfolio in the second quarter of 2017, the fund established a new 2.5 million-share stake for an average price of 4,210.91 yen ($37.80) per share. The trade expanded the equity portfolio 0.19%.

The Japanese pharmaceutical company has a market cap of 2.73 trillion yen; its shares were trading around 4,167 yen on Thursday with a price-earnings ratio of 40.84, a price-book ratio of 2.21 and a price-sales ratio of 2.98.

The Peter Lynch chart suggests the stock is overvalued.

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GuruFocus rated Daiichi Sankyo's financial strength 8 out of 10. Despite seeing a decline in revenue per share over the past 12 months, the company has a comfortable level of interest coverage and a good Altman Z-Score of 4.36. The company's profitability and growth did not fare as well, scoring a 7 out of 10 rating. Although the operating margin is in decline, the company is supported by a high Piotroski F-Score of 7 and a one-star business predictability rank.

The fund holds 0.39% of the company's outstanding shares.

Teladoc Health

Vanguard purchased 1.46 million shares of Teladoc Health for an average price of $60.44 per share, giving it 0.17% space in the equity portfolio.

The New York-based telemedicine company, which uses telephone and videoconferencing technology to provide medical care remotely, has a $4.51 billion market cap; its shares were trading around $64.36 on Thursday with a price-book ratio of 4.39 and a price-sales ratio of 10.90.

According to the median price-sales chart, the stock is trading above its historical value.

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Despite issuing approximately $500.9 million in new long-term debt over the last three years, Teladoc's financial strength was rated 6 out of 10 by GuruFocus. In addition, the Altman Z-Score of 5.78 suggests the company is in good fiscal standing. The company's profitability and growth did not fare as well, scoring a 3 out of 10 rating as a result of negative margins and returns that underperform industry peers. It also has a moderate Piotroski F-Score of 4, which suggests operations are stable.

With 2.20% of outstanding shares, Baron is the company's largest guru shareholder. Pioneer, Gabelli, Simons' firm and Jones also have positions in the stock.

Additional trades

During the quarter, Hynes also established positions in Argenx SE (ARGX), Teleflex Inc. (TFX), Shire PLC (SHP.L), Wuxi AppTec Co. Ltd. (HKSE:02359) and Loxo Oncology Inc. (LOXO).

According to GuruFocus, Vanguard's $42.73 billion equity portfolio, which is composed of 94 stocks, outperformed the S&P 500 in 2018 with a return of 1.15%. The index posted a -5.97% return.

Disclosure: No positions.

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This article first appeared on GuruFocus.