Unloved listed in vitro fertilisation (IVF) related companies may have finally caught a break with the share prices of Virtus Health Ltd (ASX: VRT) and Monash IVF Group Ltd (ASX: MVF) strongly outperforming the market yesterday.
Virtus Health shot up 3.2% to $5.20 while Monash IVF raced up 2.5% to $1.25. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) only managed a gain of 0.5%.
But it's still a long road to redemption. Virtus Health is still down nearly 17% and Monash IVF is even further behind with a 38.5% drop in value since the start of this calendar year.
On the other hand, there is light at the end of the tunnel. Morgans has upgraded both stocks from "hold" to "add" as it believes the underperformance of both stocks have brought them into value territory.
What's more, the broker noted that recent commentary during Virtus Health's annual general meeting gave it confidence that the core operations have stabilised.
While there was weakness in the Queensland market due to competition from Primary Health Care Limited (ASX: PRY), its Victoria and New South Wales operations are improving.
Investors haven't been quite willing to give management the benefit of the doubt, especially after Monash IVF's unexpected downgrade last week although the issues impacting on Monash IVF are company specific.
Monash IVF blamed the loss of a key doctor and costs relating to the transitioning to a new CEO for the downgrade in first half FY18 net profit to 20% below what it achieved in the previous year. This implies an interim net profit of ~$12 million.
But Morgans noted that recent Medicare data suggested that IVF cycle growth rates are returning to the long-term average of 3% after a period of weakness.
While the broker had to cut its FY18 net profit forecasts on Monash IVF by 7.2% to $27.7 million and lowered its price target, it believes the stock is also looking like good value around these levels given its new price target of $1.52 and yield of 5.7% (or ~8% with franking added).
Morgans' price target on Virtus Health is $5.46 with a net yield of 5%, or circa 7.1% if franking is included.
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