NEW YORK (TheStreet) -- Early warning systems can show when a stock has become grossly overvalued and in danger of taking a big plunge. The report, 29 Most Dangerous Stocks, considers companies across all sectors, including health care.
The report measures dividend yield, change in cash flow, and relative value based on forward earnings to determine the extent to which a company will be able to compete for investor capital in the two-tier market now present.
This system determines which sectors are most overvalued based on the average score of its individual component stocks. Several months ago it identified the health care sector as being most overvalued given the huge run-up in pharmaceuticaland bio-med companies. Below you'll find five health care stocks which scored lowest -- zero points -- as gauged by the 29 Most Dangerous Stocks analysis. Their stock prices are primed to fall.
1. C. R. Bard (BCR)
Bard is up 35% over the past twelve months, boosted by a 15% spike in July after announcing better-than-expected second quarter earnings. The companyis doing a great job of executing its business plan, but sooner or later, investors may begin asking themselves if its 10% profit margin and 4% quarterly revenue growth justifies a forward price to earnings ratio of 19 in the face of flattish cash flow and miniscule dividend yield?
DaVita has an even bigger problem than Bard. Its share price has already declined by 13% over the past four months, and yet it still appears grossly overvalued priced at 17 times forward earnings with deteriorating cash flow and no dividend yield. Its growth-by-acquisition strategy needs to pay off soon, as rising interest rates tend to expose companies using a lot of debt to sustain growth.
Perhaps more so than the other four companies on this list, Edwards' foreign currency exposure represents a substantial threat to future earnings due its dependence on emerging markets and Asia for revenue growth. However, its mostly smart money shareholders (96% of its float is owned by insiders and institutions) don't seem worried about that, given its forward PER of 28 despite paying no dividend. But if they start to lose patience with Edwards, the floodgates could swing wide open.
The bad news is Intuitive Surgical has already lost more than 15% of its value over the past nine weeks despite posting solid second-quarter results; the worse news is it is still trading at 24 times forward earnings and has not been able to grow its operating cash flow. And the fact that its strongest growth market is Asia doesn't bode well for future earnings.
Here is how overvalued Regeneron is: Its stock price has dropped more than $100 over the past two months and it's still trading at 30 times forward earnings! Not helping: The best news it has announced lately involves a new marketing agreement for a cholesterol drug in Europe, whose sales will translate into a strong dollar thereby lessening the impact on its bottom line. And with 75% of its float owned by institutions, it wouldn't take much short selling to send this stock down the charts.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.