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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (45887)	10/16/2009 12:35:14 AM
From: Johnny Canuck	Read Replies (1) \| Respond to of 70540

The Patient Investor Healthy Bargains John W. Rogers Jr., 10.15.09, 11:40 PM EDT Forbes Magazine dated November 02, 2009 Look for cheap stocks in the health care sector. The ideal candidate has a specialty or strong brand, relatively stable profit stream and low debt. Gloomy headlines don't bother me because bad news often makes for great investments. As Sir John Templeton said: "If you want to have a better performance than the crowd, you must do things differently from the crowd." That sounds simple, but few investors abide by this advice. When everyone is optimistic and bidding stocks up to lofty levels, my job is hard. Right now, though, it's very exciting and fun to sift through companies left for dead that are still very viable. The health care sector has got plenty of bad press recently. This has led me to search for hidden gems there. Two themes have been dominant in the negative views: that a weak pipeline won't be able to replace the blockbuster drugs facing patent expirations and that federal health care legislation will kill profits. Now, I don't have a crystal ball to tell me which drugs in development will succeed nor one to tell me exactly when health care stocks will recover. I do know something, however, about the history of selloffs in health care stocks. The biggest one came during the days of President Clinton's unsuccessful health care reform plan in 1994. In the five years following that fiasco, health care stocks in the S&P 500 index quintupled in value. Article Controls email print reprint newsletter comments share del.icio.us Digg It! yahoo Facebook Twitter Reddit rss Yahoo! BuzzThese days some of the bellwethers in the sector are cheaper than they were in 1994. (Merck ( MRK - news - people ), for example, was going for 16 times trailing earnings in 1994; now it's at 11 times.) This is true, moreover, despite the fact that earnings have held up much better in the health care sector than elsewhere. The S&P 500 fell hard from mid-2008 through early 2009, with both earnings and valuation multiples sliding. Then sentiment picked up, so price-to-earnings ratios recovered. But the earnings part of the equation hasn't kicked in yet. For health care companies the story is different. While the overall economy is still sitting near its trough, health care earnings have almost fully recovered. I don't think the stocks are reflecting that today. The sector has plenty of bargains. To me the ideal candidates have a specialty or strong brand, a relatively stable profit stream and low debt. Here are three firms that fit that description, all of which I have been buying since mid-2008. Laboratory Corp. of America ( LH - news - people ) (LH, 66) does medical laboratory tests, everything from common blood and urine tests to complicated genomic and cancer tests. Testing is critical to good health care and will not decline in volume, even in a world where government or private insurers are trying to restrict outlays. Many investors worry that new regulations will depress prices or cause doctors to test less often. Testing, however, represents only 4% of health care spending but drives 70% of health care decisions. In other words, Americans already get good value from the tests LabCorp provides. This is likely to continue. LabCorp trades at 14 times trailing earnings and 12 times what I expect for the next 12 months. Featured Content 200 Best Small Companies The 10 Best Places to Retire Abroad Finding the Next Epidemic Before It Kills Bad News: Treasury Interest Rates Are Falling Complete Contents Special Offer Free Trial Issue of Forbes Other PublicationsForbes Asia Magazine ForbesLife Magazine PublicationsRate This Story Your Rating Overall Rating Reader Comments Post a CommentHospira ( HSP - news - people )(HSP, 43), a spinoff from Abbott Laboratories ( ABT - news - people ), produces injectable pharmaceuticals, pumps and intravenous products. That may not sound as sexy as biotechnology, but it makes good money. The business of injectable pharmaceuticals is growing rapidly because putting drugs right into the bloodstream often works better than swallowing them--and in this technical area Hospira is the trusted market leader. This gives it a lasting leg up on competitors. The stock currently trades at a 15% discount to my estimate of its intrinsic value. Zimmer Holdings ( ZMH - news - people )(ZMH, 51) makes artificial hips and knees. These are expensive, so investors are afraid that the government will force it to cut prices. True, prices may come down, but think about the other consequence of health care reform. Roughly 50 million Americans who lack health insurance may now be in line for knee and hip replacements. Zimmer has been an impressive grower, and its stock has historically traded at a premium to that of its peers. Now it is cheaper. When I first bought it in May, Zimmer traded near early 2003 prices, when it went for 30 times trailing earnings. Today it trades for only 14 times earnings, by comparison. One more thing I like about Zimmer is that it's a company with sticky products. When doctors become trained on a particular hip replacement, they stick with it. This creates a huge barrier to entry for competitors. John W. Rogers Jr. is chairman and chief executive officer of Chicago-based Ariel Investments, LLC, the adviser to the Ariel Mutual Funds. Visit his home page at www.forbes.com/rogers. Special Offer: Free Trial Issue of Forbes