For much of the two-year-plus stock market rally, the healthcare
sector has been left far behind the rest of the market. From the
March 9, 2009 low through Feb. 23 of this year, for example, the
S&P 500 gained more than 93%; the Healthcare Select SPDR
exchange-traded fund (
), meanwhile, gained less than half that -- just 46.3%.
That's changed recently. While the rest of the market has
stumbled amid the turmoil in the Middle East and the tragic
earthquake and tsunami in Japan, many healthcare stocks have pushed
higher. And year-to-date, long-term care facilities, medical care,
and health care plans are all among the top industries in terms of
year-to-date returns, according to Morningstar.
Even with their strong performance in recent months, many
healthcare stocks still look quite attractive to my Guru
Strategies, each of which is based on the approach of a different
investing great. With fears about the healthcare bill starting to
subside, and with fears of an economic slowdown causing many
investors to focus more on defensive areas of the market, I thought
it would be a good time to take a look at some of the healthcare
plays my models are highest on right now.
Catalyst Health Solutions Inc. (
: Based in Maryland, this pharmacy benefits manager ($2.4 billion
market cap) earlier this month purchased Walgreen's (
) PBM operations for $525 million, in a deal that increased its
membership from 7 million to 18 million. Shares have surged about
20% since then, but two of my models think Catalyst is still a good
buy at its current price.
One is my James O'Shaughnessy-based growth stock model, which
looks for firms that have upped earnings per share in each year of
the past five-year period, which Catalyst has done -- even in the
face of one of the nastiest recessions on record. The model also
looks for a key combination of variables: A high relative strength,
which is a sign the market is embracing the stock, and a low
price/sales ratio, which is a sign it hasn't gotten too pricey.
Catalyst has a solid 12-month relative strength of 68, and its P/S
ratio of just 0.64 comes in well below this model's 1.5 upper
My Martin Zweig-based growth model also likes Catalyst. It looks
at earnings growth from a variety of angles, and Catalyst passes
most of its tests. The firm has grown EPS at an impressive 25.7%
rate over the long term (I use an average of the three-, four-, and
five-year EPS growth rates to determine a long-term rate), and it's
also getting its growth from revenues, rather than one-time
cost-cutting measures. Sales have grown at a 32.6% rate over the
long term, and an even-better 49.3% rate in the most recent
AmSurg Corp. (
: Based in Nashville, Tenn., AmSurg owns and operates a network of
more than 200 ambulatory surgery centers across the U.S., in
partnership with physicians. The small-cap ($788 million market
cap) hasn't had one annual EPS drop in the past decade, despite the
tough economic conditions that often prevailed.
AmSurg gets very high marks from the model I base on the
writings of hedge fund guru Joel Greenblatt. In his
Little Book that Beats the Market
, Greenblatt unveiled a remarkably simple approach that examined
only two variables: Earnings yield and return on capital. AmSurg
excels in both categories, with a 22.1% earnings yield and a 105.9%
return on total capital. Those figures make AMSG the
third-most-attractive stock in the market, according to this
My O'Shaughnessy-based growth model also likes AmSurg, which has
a decent 55 relative strength and an attractive 1.1 price/sales
Alcon, Inc. (ACL)
: The largest specialty eyecare company in the world, Alcon ($50
billion market cap) has operations in 75 countries and its products
are sold in more than 180 countries. The firm is majority-owned by
), incorporated in Switzerland, and has a U.S. base in Texas.
Alcon gets high marks from my Warren Buffett-based strategy.
This approach looks for firms with lengthy histories of earnings
growth, manageable debt, and high returns on equity (which is a
sign of the "durable competitive advantage" Buffett is known to
seek). Alcon delivers on all fronts. Its EPS have dipped in only
one year of the past decade; it has no long-term debt; and it has
averaged a 38.2% ROE over the past 10 years, more than
two-and-a-half times this model's 15% target.
Universal American Corp (UAM)
: This Rye Brook, N.Y.-based firm and its subsidiaries offer a
variety of healthcare products, including traditional health
insurance, Medicare managed care plans, and Medicare prescription
drug benefits, focusing primarily on senior citizens.
Universal American ($1.7 billion market cap) gets high marks
from my Peter Lynch-inspired model, which considers the stock a
"fast-grower" thanks to its 25.1% long-term EPS growth rate. Lynch
famously used the P/E/Growth ratio to find undervalued growth
stocks, looking for P/E/Gs below 1.0. When we divide Universal
American's 10.0 P/E ratio by its growth rate, we get a P/E/G of
just 0.4 -- a sign that it's a bargain.
For financial firms, this approach looks for companies with an
equity/assets ratio of at least 5% and a return on assets rate of
at least 1%. At 41.0% and 5.02%, respectively; Universal easily
passes both tests.
I am long CHSI, AMSG, UAM.
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