A Trio of Healthy Choices

 | Jun 22, 2012 | 1:30 PM EDT
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The health care industry tends to perform well, even in the type of weak economy that we have now. With this doing well, it is no surprise that sectors of it are doing well, too. Currently, health care facilities are enjoying a starring role with my guru strategies.

These strategies are automated screening tools I based on the writings of well-known investment gurus, and when they identify a few companies from one industry as worthy of buying, then I believe that industry is destined to do well.

One of the companies in this market that earns a high guru grade is Bio-Reference Laboratories (BRLI), which is a regional clinical laboratory that performs chemical-diagnostic tests, such as blood and urine analysis. It earns strong accolades from the strategy I base on the writings of James P. O'Shaughnessy. This strategy looks for a market cap greater than $150 million (Bio-Reference's is $708 million), earnings per share (EPS) that increased in each of the past five years (check) and a price-to-sales ratio south of 1.5. Bio-Reference's P/S ratio is well below that maximum, being 1.16. The final criterion is that the relative strength of the company be among the top 50 of the stocks screened using the previous criteria. Bio-Reference's relative strength of 84 places it in this top 50 cohort.

Magellan Health Services (MGLN), a specialty health care manager, is favored by my guru strategy based on the writings of Peter Lynch. This strategy focuses on the P/E/G ratio, which is price-to-earnings relative growth and is a measure of how much the investor is paying for growth given a stock's current price. A P/E/G of up to 1.0 is allowed, and Magellan is well below that with a P/E/G of 0.62. Another big plus for the company: no debt.

AmSurg (AMSG) acquires, develops and operates 228 surgery centers in partnership with physician groups. I have a guru strategy modeled after the writings of Joel Greenblatt, which has only two variables: earnings yield and return on total capital. It ranks each stock based on these variables from among the thousands of stocks in our database, and then calculates a final ranking. AmSurg ranks 61 by its earnings yield and 37 based on its return on capital. These are excellent rankings, but AmSurg really shines in its combined final ranking: It is No. 4 among all the stocks in the database.

I would not necessarily say health care is recession proof, but it does tend to do well even when the economy is shaky -- and will likely continue do well as the American Baby Boomer population ages. All of these companies are in a good position to take advantage of the strong demand for health care services.

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