Portfolio Rx: Medical Picks

11/22/2002 12:00 am EST


"The art of medicine consists of amusing the patient while nature cures the disease," said Voltaire. Thankfully, the medical community has made great advances since the 1700s when the French author and philosopher made his cynical observation. Indeed, the ability of medical technology to diagnose, treat, prevent, and cure disease, is truly awe-inspiring. In this issue of The Money Show Digest, we focus exclusively on stock picks in the medical sector, with an emphasis on emerging technologies.

Medical technology is indeed revolutionizing our lives and the investment opportunities are vast. Many advisors now believe the political winds favor the drug and healthcare sectors. Further, many advisors note that emerging medical technology stocks have shown strong relative strength throughout the bear market, and they believe these stocks are now poised to be among the leaders of the next bull market phase.

Michael Murphy, editor of Health Investing and Biotechnology Investing says, "Bulls or bears, booms or busts, nothing can stop a tidal wave of aging people from crashing on the shores of the healthcare industry. In our view, healthcare is the defining investment of this decade. President Bush's mid-election sweep has given our healthcare stocks a 1,000-volt jolt. His cornerstone promise is a healthcare system that works. Now, with full control of Congress, he can secure a prescription-drug benefit plan that relies on the private-sector, and that wards off government-imposed price caps.

"We also believe the current political situation will break the FDA logjam. It's a new era at the FDA; there's a new commissioner and a real sense of urgency in Congress to get approval speeded up. We also foresee a clearer path for cheaper drugs. Bush knows he needs the AARP vote in 2004 and cheaper generic drugs will be the result. We also expect a push towards cheaper therapies. There is a new generation of drugs that are non-toxic, and offer fewer side-effects which result in shorter hospital stays, higher survival rates, and lower total costs. Overall, a nimbler FDA, cheaper drugs and therapies with fewer side-effects, will benefit many companies. And these gains will only pick up speed as Bush's healthcare agenda takes hold in January 2003."

As in any high growth market, investors must be aware of the risks. Many medical companies are subject to regulatory approval that may make or break the company. Particularly sensitive to these risks are companies in the biotechnology arena, where their futures may hinge on a limited number of products. More conservative investors may want to look at the large pharmaceutical companies. With their operations spread across a wide variety of markets, these firms are less dependent on the success or failure of a single product or technology.

John Murphy of murphymorris.com says, "Drug stocks have recently been a bright spot in the market. These stocks have shown good relative strength of late and the Pharmaceutical Index closed over its August high. Two of the more impressive charts belong to Bristol Myers Squibb (BMY NYSE) and Merck (MRK NYSE). Both have already exceeded their summer highs. BMY has broken through its August-September peak to achieve a bullish breakout. Merck has already cleared its 200-day average. Abbott Laboratories (ABT NYSE) also appears to be on the verge of a new recovery high.

Richard Sparks, an analyst with Schaeffer’s Investment Research, notes, “The AMEX Pharmaceutical Index could benefit from the Republican-controlled government. The index has slightly surpassed potential resistance at 311 and has set its sights on its ten-month moving average overhead at 325. Also of note, sentiment toward the sector remains pessimistic. Short interest for the members of the Index has risen in four straight months to its highest level in 18 months. The 15 stocks in the Index have a total short interest of more than 289 million shares. If the Amex Pharmaceutical Index can break through resistance points on its way higher, this pessimism may provide the fuel for a continued move higher.”

Despite maintaining a bearish stance on the overall market, Jim Stack, editor of InvesTech Market Analyst, holds two healthcare companies in his model portfolioPfizer (PFE NYSE), the research-based global drug company, and Renal Care (RCI NYSE), which operates 228 outpatient renal dialysis facilities and provides acute dialysis services to 118 hospitals. Meanwhile, Louis Navellier, in his MPT Review, likes Coventry Health Care (CVH NYSE). "Conventry is a managed healthcare company. It recently reported earnings of 66 cents a share, three cents better than estimates."

One area that has gained a lot of interest among investment advisors is the generic drug sector. Sharon Parker’s Undiscovered Stocks, published by Martin Weiss, says, "The generic industry is poised to soar as a result of pending pro-generic legislation, aging baby boomers, the need to offer drug coverage to seniors, the high costs of prescriptions, and big brand names coming off patent. Barr Labs (BRL NYSE) is undervalued; its p/e of 12.7 is significantly discounted compared to its peers. Buy up to $63." Also in her portfolio is Ivax (IVX AMEX). "We recently met with senior management to discuss the company’s product pipelineboth generic and brandedas well as its international business plans. We believe that this company really has its act together. These shares should eventually perform in aces and spades."

Vivian Lewis, editor of Global Investing, seeks stocks anywhere on the globe as long as they present value. Her buy and hold global portfolio currently includes Israel-based generic drug maker, Teva Pharmaceuticals (TEVA NASDAQ). She says, "Teva has been reaching new highs. It reported record-smashing results with net income up 21% and earnings up 22%. Results were supercharged by the multiple sclerosis drug, Copaxone."

Another area that is receiving a lot of attention from advisors are those companies involved in cardiovascular products and services. Several are featured in this issue of the Digest. In addition, Multex Investor, which uses an in-depth four-part screening system, director of research, Marc Gerstein, is bullish on Merit Medical (MMSI NASDAQ), which produces single-use medical products primarily for use in diagnosis and treatment of cardiovascular disease. "Once we get past some short-term stock turbulence, it looks like we'll have a great relative value opportunity."

For broad diversification within the sector, Jim Lowell, editor of Fidelity Investor, is bullish on Fidelity Health Care, while Dan Wiener, editor of The Independent Adviser for Vanguard Investors, is positive on the outlook for Vanguard Health Care.

In this special issue of The Money Show Digest, we look at a wide variety of investment opportunities in the healthcare and emerging medical technology sectors. We hope that some of these selections are the right prescription to add healthy gains to your long-term portfolio.

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