The Cream of Healthcare

 | Jul 13, 2012 | 6:00 PM EDT  | Comments
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Someone is always profiting from the misfortune of others -- undertakers, auto collision shops, divorce attorneys and Weight Watchers (WTW) are examples. Then there's the country's largest industry: healthcare.

As a historically noncyclical industry, the prospects for healthcare have rarely been healthier. Demand tends to hold up even when the economy is sickly, because people need health services no matter what the economy does. Aging baby boomers are increasingly in need of healthcare services, and that will boost demand over the long term. Further, over time, the recent Supreme Court ruling upholding the Affordable Care Act will also likely increase Americans' usage of healthcare.

My website, Validea.com, employs the strategies of well-known investment gurus that I have automated to find promising investment opportunities. Using these strategies, the Validea Pro Healthcare portfolio is today up about 20% for the year. It would not surprise me if investor fear over the Affordable Care Act has held down healthcare stocks, even as they have performed well this year. If I am correct, these still have ample room to move up in the coming months and years, which is why I want to recommend some healthcare stocks now. Here are three to consider.

Pfizer (PFE), founded in Brooklyn, NY in 1849, is the world's largest pharmaceutical company. The strategy I base on James P. O'Shaughnessy's writings is very positive about Pfizer. It likes the company's huge capitalization ($168 billion), positive cash flow per share of $1.45, large number of shares outstanding (609 million) and its behemoth sales, which total $66 billion. As a final step, the strategy looks for the 50 stocks that pass the previous tests and have the dividend yield. With a 3.92% yield, Pfizer makes it into this select circle of top stocks.

PDL BioPharma (PDLI) is a biotech company with a patented process to create humanized antibodies. Antibodies are proteins in the immune system that help the body defend against foreign invasion, particularly from pathogens and toxins. PDL was founded in 1986 and engages in the management of antibody humanization patents and royalty assets, which consist of its patents and license agreements with various biotechnology and pharmaceutical companies.

My Joel Greenblatt-based automated strategy says PDL is worth a look. This strategy uses just two variables: earnings yield and return on total capital. It ranks the stock by each of these variables among all the stocks in our database, then derives a final ranking. Among those thousands of stocks, PDL currently ranks No. 1.

Orthofix International (OFIX), which is based in the Netherlands, makes orthopedic devices used during and after surgery. Its primary markets are orthopedics and spine, and its products are used for deformity correction, internal and external fracture fixation and regenerative stimulation, among other medical needs.

The strategy I modeled after Peter Lynch's approach to investing is an Orthofix fan. This strategy's most important variable is the P/E/G ratio, which is price-to-earnings relative to growth, and is a measure of how much the investor is paying for growth. A P/E/G of up to 1.0 is acceptable, and Orthofix's 0.68 is well below this threshold. Also in the company's favor is the good job it is doing managing its inventories.

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