How To Heal a Portfolio

 | Aug 30, 2011 | 1:30 PM EDT
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People require medical services, no matter how the economy is doing. Health care may not be a fully recession-proof sector, but it certainly can sustain itself even in tough economic times.

Year to date, the S&P Healthcare Index is up 2%. The index has risen 1% since August 1, 2008, just before the financial meltdown. This increase may seem anemic, but the market's overall performance as measured by the S&P 500 is down 6% for the year and off 7% since August 1, 2008. While the market, in general, is feeling sickly, health care is experiencing only mild indigestion.

This is why medical equipment makers and suppliers deserve your attention. Three names appear very healthy, as measured by my guru strategies, which are computerized strategies I modeled after the strategies used by a number of the world's best-known investors.

PSS World Medical (PSSI) is the country's largest supplier of medical products to physician practices. It carries more than 55,000 different medical products, 70% of which are supplies, 20% equipment and the remainder, pharmaceuticals. It distributes to approximately 100,000 offices.

One of my strategies, based on James P. O'Shaughnessy's approach to investing, gives PSS a perfect grade. The strategy requires a company to have a market cap of at least $150 million, and PSS' is about $1.2 billion. Also necessary is an increase in earnings per share (EPS) for each of the last five years, which holds true for PSS. In addition, the price-to-sales ratio must be less than 1.5 because companies with such low P/S ratios are growth companies with well-priced stocks. PSS's price-to-sales ratio is nice and low at 0.58.

The final criterion is to take those companies that pass the previous criteria and find the top 50 based on their relative strength (which is a measure of how well a stock has performed in the last year vis-à-vis the overall market). PSS' relative strength of 71 places it in the top 50. This company is healthy, indeed.

Intuitive Surgical (ISRG) is another company doing well. It manufactures a robotic system called da Vinci that assists surgeons performing minimally invasive surgery. The system is used in more than 1,450 hospitals worldwide.

My strategy for this name is based on the writings of Peter Lynch and pinpoints Intuitive Surgical as a stock worth owning at this time. The strategy is best known for its use of the price-to-earnings relative to growth ratio (P/E/G), which is a measure of how much the investor is paying for growth given the stock's current price. A P/E/G of 1.0 or less makes the grade, and Intuitive Surgical is a winner with a P/E/G of 0.86. Good control over inventories and absolutely no debt is also in the company's favor:

The third company worth mentioning is St Jude Medical (STJ). Like Intuitive Surgical, St. Jude gets high grades from the Lynch strategy. The company manufacturers cardiovascular and other medical devices, which include the world's most widely used mechanical heart valve. Also found in its product line are implantable cardioverter defibrillators, cardiac resynchronization therapy devices, pacemakers, electrophysiology catheters, mapping and visualization systems, spinal cord stimulation and deep brain stimulation devices.

The company's yield adjusted P/E/G ratio is a solid 0.77, inventories are well managed and debt is at an acceptable level.

These three companies are leaders in their particular markets and are identified as winners by the guru strategies. If your portfolio has been under the weather for some time, these stocks could provide the right antidote.


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