Brett Owens is a leading on income investing; the editor of the industry-leading Contrarian Outlook ...
Two Winners in Hot Industries
11/12/2009 12:00 pm EST
Richard Band, editor of Profitable Investing, says technology and health care continue to do well in a struggling economy, and he finds a likely winner in each industry.
Even in today’s troubled economy, two industries continue to blossom: health care and information technology.
People get sick and want faster, more reliable cures. Households and (especially) businesses are looking for ways to process more information, more quickly—and at less cost. These megatrends don’t vanish just because housing is in the dumps.
Accordingly, I expect that these two industries will produce some of the stock market’s biggest winners as the bull matures.
Quest Diagnostics (NYSE: DGX) operates America’s leading chain of diagnostic laboratories for patients and physicians. With the Baby Boomers entering the stage of life when illness becomes more prevalent, demand for medical tests is bound to surge.
DGX has competitors, of course; and some of the health care “reform” bills threading their way through Congress would impose a one-time rollback in lab charges. But these are minnows nibbling at a whale. Keep your eye on the main facts—that DGX is steaming along toward record profits in 2009 (up a projected 16% from 2008), that another solid gain is likely in 2010, and that the stock is trading at a mere eight times cash flow, barely half what it fetched three years ago.
Quest also boasts a modest debt load, with total debt amounting to less than a quarter of the company’s enterprise value (market value of stock plus net debt).
Oracle (Nasdaq: ORCL) chief executive officer Larry Ellison makes waves with his dismissive quips about rivals. In its field of expertise, though, nobody can catch ORCL. The maker of database software for big businesses and governments has notched seven consecutive years of rising earnings per share—a record even mighty Microsoft (Nasdaq: MSFT) can’t touch.
Oracle’s recent takeover bid for Sun Microsystems (Nasdaq: JAVA) has raised some eyebrows (and objections on antitrust grounds from the European Commission). However, Oracle customers give the deal rave reviews. What’s more, Ellison’s team has enjoyed far greater success than most other Silicon Valley executive suites at integrating acquisitions.
If Larry can keep his ego in check (insiders say he has mellowed at age 65), the Sun transaction could boost ORCL’s growth rate and help the stock to a 50% gain in the next 18 to 24 months.
[So,] buy DGX at $56 or less and ORCL at $21.50 or less. (Quest traded at around $58 Wednesday and Oracle changed hands below $22—Editor.) We’re tracking both stocks in the model portfolio as World-Class Franchises.
Both Quest and Oracle pay skimpy dividends (yield under 1%). Thus, we’re buying these stocks primarily for capital appreciation, not current income.
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