Rules of the Game: Healthcare Stocks Show Big Potential

 | Jan 14, 2013 | 12:30 PM EST
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It's a good idea to have several various ways of sifting through the universe of stocks to identify those that have potential. For instance, criteria I use include earnings history, earnings estimates, price relative to key moving averages, and volume trends. Other favorites are screens that scan for sector and industry strength.

It's always informative to see which stocks show up on multiple screens. I've written about health care stocks frequently in the past several months, but when it came to top-performing stocks on a recent sector scan, I was more than a little surprised to see how much the medical sector dominated. Out of 21 sector leaders that bubbled to the top of my scan, 19 hail from health care.

Novo Nordisk (NVO), a Denmark-based maker of insulin treatments, gapped up to an all-time high Friday. It closed at $173.09, a gain of 1.3%. The company is expected to report 2012 results later this month. For the year, analysts see earnings of $6.59 per share, a gain of 19% over 2011. For this year, Wall Street is eyeing income of $7.88 per share, which would mark another 20% increase.

Other metrics also bode well for the stock. Return on equity is a whopping 48%. Earnings and revenue growth both accelerated in recent quarters. Free cash flow per share grew in each of the past four years, coming in at $5.48 most recently. Its dividend yield is 1.1%.

Being at a new high, the stock is extended from a reasonable buy point at this juncture. It closed Friday nearly 8% above its 50-day average and 13% above its 200-day. Investors seeking a large-cap medical name that's in growth mode may want to give Novo Nordisk a look, but they would be best served by waiting for a pullback to offer a more attractive entry point.

Another large-cap medical sector leader is the hospital operator HCA Holdings (HCA). This stock also has youth in its favor, having made its NYSE debut in March 2011. Stocks that went public within the past 10 or 12 years are often among the market's best price performers.

One person's bad news is often another's good news. That's the case with HCA, which likely got a boost on news of a worse-than-usual flu season, which has been sending patients to emergency rooms.

HCA has a market cap of around $17 billion, and it moves 4.8 million shares per day.

The company is expected to report fourth-quarter and 2012 results in early February. Analysts expect the full year to finish with earnings of $3.63 per share, a year-over-year gain of 28%.

But use some caution if you are considering a purchase. As with Novo Nordisk, HCA's new high means the stock is extended from reasonable buy range. It's a risky strategy to buy an extended stock, as it could be ripe for a pullback soon.

HCA closed Friday at $33.20, 9% above its 50-day moving average and 21% above its 200-day. That means it's best to be patient and wait for a moving-average pullback, which can serve as a springboard for further price gains.

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