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. Since Feb. 23, the S&P is down more than 3%, but the
Healthcare Select SPDR ETF has held its own, and is pretty much
flat.
Within the sector, some areas have had more impressive bullish
runs. Long-term care facilities, medical care, and health care
plans are all among the top eight industries in terms of
year-to-date returns, according to Morningstar, and are well in the
black.
The story behind healthcare's ups and downs seems to center on
the massive healthcare reform bill the U.S. passed last year, which
generated a wave of fear about how the legislation would impact
profits. But as often happens with crises, the initial fears were
likely overblown. That pushed healthcare stock valuations way down
-- in many cases into single digit price/earnings ratio
territory.
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. (
CHSI
):
Based in Maryland, this pharmacy benefits manager ($2.5 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 75, and its P/S
ratio of just 0.64 comes in well below this model's 1.5 upper
limit.
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), for
example, and it's also getting its growth from revenues -- not
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 quarter.
AmSurg Corp. (
AMSG
):
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 ($775 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 22.2%
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 model.
My O'Shaughnessy-based growth model also likes AmSurg, which has
a decent 57 relative strength and an attractive 1.1 price/sales
ratio.
Alcon, Inc. (
ACL
):
The largest specialty eye care company in the world, Alcon ($49
billion market cap) has operations in 75 countries and its products
are sold in more than 180 countries. The firm is majority-owned by
Novartis, 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 ten 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 ($1.6 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 9.4 P/E ratio by its growth rate, we get a P/E/G of just
0.38 -- 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.
LHC Group, Inc. (
LHCG
):
Louisiana-based LHC offers home health, hospice, private duty and
long-term acute care service to the elderly and other homebound
patients. It's a small-cap ($540 million), so it may be more
volatile than larger stocks, but my Joel Greenblatt-based model
thinks it's worth a good look.
LHC has an earnings yield of 17.8%, which ranks 69th out of the
thousands of stocks I track. Its return on total capital of 101.2%,
meanwhile, ranks 39th. Together, those figures make LHC the
13th-most-attractive stock in the market, according to the
Greenblatt-based approach.
I'm long CHSI, AMSG, UAM and LHCG