Rules of the Game: Healthy Fundamentals

 | Jan 17, 2013 | 11:30 AM EST
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As I mentioned in my most recent column, in terms of being home to large numbers of stocks with an outstanding combination of earnings growth and price appreciation, the medical sector continues to outperform others.

While I have been focusing on larger-cap names, since those can often be appropriate additions to add alpha to client portfolios, I couldn't help noticing that two of Tuesday's heavy-volume price movers were small-cap healthcare stocks, AmSurg (AMSG) and Santarus (SNTS).

The former company runs outpatient surgery centers in 35 states and Washington, D.C. As of Wednesday's close, the stock was up 5% for the week. The move followed news that the company would get a $2.3 million tax incentive for consolidating its Nashville headquarters into one building. The stock closed Wednesday at $31.29. It is approaching its July 20 all-time high of $32.17.

Santarus, meanwhile, gapped up to a multi-year high of $13.09 on Tuesday. The stock closed at $12.52. This maker of treatments for gastrointestinal ailments leapt 11% Tuesday on two pieces of good news. First, the company got the FDA's OK for its ulcerative colitis drug, Uceris. Second, Santarus also said it expects to meet or beat its previous 2012 guidance, and issued a better-than-expected revenue outlook for this year.

The company is expected to report fourth-quarter and 2012 results early next month. Wall Street has pegged fourth-quarter earnings at $0.02 per share, and revenue at $61.57 million. That would be a 44% year-over-year increase on the top line, but a decrease of a penny on the bottom line.

Turning to large-cap medical names, a significant gainer in the past couple of weeks has been Ireland-based Shire (SHPG), which makes products for treating hyperactivity and gastrointestinal disorders.

In recent weeks, the company has delivered news that pushed the stock higher. Earlier this month, Shire said it would acquire privately held Lotus Tissue Repair, which develops protein replacement therapies.

A few days later, CEO Angus Russell reiterated the company's expectation for double-digit earnings growth in 2012. The company is expected to report 2012 results in mid-February.

The stock continues to consolidate beneath its February, 2012 all-time high of $108.79. It closed Wednesday at $99.79. That is extended from a reasonable buy point, as it is 10.7% above its 50-day line and 10.3% above its 200-day moving average. However, keep a close eye on those moving averages. The 50-day line is poised to cross above the 200-day, which is a potentially bullish development.

Shire is definitely sending out some mixed signals. Revenue growth rates have been decelerating over the past five quarters, from 25% to 1%. Also, for a large cap, the stock is somewhat thinly traded, moving about 298,000 shares per day. That's not unusual in overseas-based stocks, which can be off the radar of some U.S.-based hedge fund and mutual fund managers.

Other indicators look better: Free cash flow per share, a gauge of a company's ability to finance projects without taking on more debt, has increased in the past two years, and in the trailing 12 months.

So what is the best way to handle this stock? Given the bullish moving-average crossover that appears ready to happen, I would like to see a pullback to a short-term moving average, such as the 5-, 8-, 10-, or 15-day line. Support at one of these price lines could offer the next chance to grab shares.

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