4 Blue-Chip Health-Care Picks on Sale (and the Portfolio Is Up 163% Since 2006)

 | Jan 11, 2017 | 4:00 PM EST
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Health-care stocks are bouncing back after a brutal 2016, when they were the only major sector of the broader market to finish in negative territory.

Investors steered clear of drug makers on fears of a growth slowdown because of federal scrutiny over product pricing. There were also concerns about the looming fight over changes to the Affordable Care Act.

But the demographic trends that boosted big gains in prior years haven't gone away. An aging population bodes well for growth of drug makers as well as medical device manufacturers and managed care providers. It could be that last year's selloff has created some opportunities.

My firm Validea's health-care portfolio lagged last year, down 12.1% vs. a 9.5% gain in the S&P 500, but it has since rebounded strongly, rising 3.6% so far in 2017, almost triple the gain in the broad market. The portfolio is made up of the top-10 health-care stocks selected monthly by my consensus scoring system that utilizes the fundamental strategies of investment greats such as Warren Buffett, Peter Lynch, John Neff and a host of other stock selection models.

The Validea's Healthcare Portfolio has delivered a price return of 163% since Dec. 29, 2006 compared to a return of 56.8% for the S&P 500 and 149.6% for the Health Care Select Sector SPDR Fund (XLV) . The figures on Validea's portfolio don't include dividends, while the S&P and XLV are total return statistics inclusive of dividends.

Top holdings in the health-care portfolio currently include LeMaitre Vascular (LMAT) , Supernus Pharmaceuticals (SUPN) and Taro Pharmaceutical (TARO) .

A few things have come together to spark renewed interest in parts of the sector. The new administration in Washington comes in on the promise to rip up health insurance reforms, something that doesn't help the shares of hospital operators but does benefit biotech firms because the focus is seemingly off their big price hikes (although this was back in focus Wednesday after the president-elect's comments at his press conference).

The Danish insulin maker Novo Nordisk (NVO) is also on our list of top health-care stocks. Its shares fell 40% last year on concerns about pricing and competition, but the company has a dominant share of the market for diabetes care, with strong products and a solid pipeline. Sales tripled from 2005 to 2015.

This stock fits the model of famed investor Peter Lynch, who looked for hidden gems by examining a company's price-to-earnings ratio as it relates to growth. Novo Nordisk's P/E is 17.4 and its growth rate has been 21.6, making the stock look like an attractive buy.

Health-care stocks comprise the third largest chunk of the S&P 500 index at about 14%, making these stocks ripe for investors looking to sell other holdings and rotate back into a sector that has momentum -- as seen with the rotation into telecommunications and financial shares last year.

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