(Editor's note: This article appeared in optionMONSTER's Open
Order newsletter of April 6.)
In late March I started writing about health-care stocks because I
was worried about the fortitude of the broader market. I abandoned
that argument at the time because I found even greater strength in
metal and coal stocks, but the original idea had merit--not because
it's time to be defensive, but because health care might now be a
good sector to go on the offensive.
As I wrote last year, the current stock market is the best I have
ever seen: Just when you think the rally is over, another sector
catches the mojo. That seems to be the case now with health care, a
sector that has been in the dumps since early 2008 when the market
started worrying about increased government regulation.
Researching different companies and perusing headlines more
recently, I'm finding that things are looking better. For instance,
Questcor Pharmaceuticals leapt more than 20 percent on April 5
after reporting a giant revenue number on the strength of its
Acthar multiple-sclerosis gel.
Cubist Pharmaceuticals surged 15 percent after settling a patent
dispute. The agreement itself was minor on the surface, only
affecting a six-month period far into the future, but the real
impact was that it lifted a cloud of uncertainty because management
can now sign marketing deals. In other words, value was waiting to
Also that day, we saw a flurry of bullish activity in Irish drug
maker Elan. I won't waste space on the details here because most of
the key information is in my story, but I will refer readers back
to the discussion of moving averages. ELN is now looking pretty
interesting as it breaks free of its 500-day and its other key
long-term averages line up bullishly.
Another company that can be purchased around its current levels is
Baxter, which is trying to fill a bearish gap that occurred almost
a year ago on a terrible earnings report. It has frequently
appeared on our Heat Seeker as it climbed from the low $40s to over
$50, but for the last five months has been consolidating those
gains. The provider of blood products is now finding support at the
higher end of that range and looks like it's ready to fight its way
back as it prepares to bring new products to market.
CareFusion, which saw a bullish ratio spread recently, could be
played for a limited move. It could be purchased for $28 or less
with a $0.50 stop and a $30 price target. Not a barn burner, I
know, but not a bad risk/reward either.
There are a few other categories of stocks I want to mention. The
first are runaway breakout names such as Cerner, AmerisourceBergen,
and Mako Surgical.
CERN is riding the bullish wave in medical IT and software, while
ABC is benefiting from the trend of patients shifting to lower-cost
generic drugs. MAKO has been selling its orthopedic devices like
hot cakes, and at the end of March exploded higher after receiving
a big order.
Hospital stocks such as Health Management Associates, WellPoint,
and HealthSouth also look interesting and appear to be accelerating
to the upside. They can be purchased around their current levels
with tight stops, or on steeper pullbacks to their 30- or 50-day
moving averages. Another buy possibility around here is McKesson,
which is in a similar business as ABC and has been consolidating
after raising guidance on Feb. 1.
The third group is the beaten-down stocks sitting near long-term
support. I generally wouldn't recommend buying these when others
are actually climbing, but they should be watched for their
potential down the road. These include Teva Pharmaceutical
Industries, Amgen, and MedcoHealth Solutions.
Saving the best for last, I want to end with Endo Pharmaceuticals.
This company, whose main products are in pain management, made a
giant move last year, consolidated and is just now breaking into
new territory. ENDP may pause around the $40 level or even pull
back toward $38-$39, but it seems to be in the midst of a secular
bull run and will probably be much higher in one year.
The valuations are especially enticing because its trades for just
9 times forward earnings, despite 30 percent revenue growth. It
also has a price/sales ratio of less than 3 times, less than half
the premium that many other drug makers command.
(Chart courtesy of tradeMONSTER)