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  1. Home
  2. / Investing
  3. / Healthcare

Two Growth Opportunities in Healthcare

Mednax and Salix have reasonable valuations and upside catalysts.
By BRET JENSEN
May 30, 2013 | 01:00 PM EDT
Stocks quotes in this article: MD, SXLP

It is has been an interesting two weeks in the market, to say the least. Equity investors have been treated to more volatility and intraday reversals that they have seen in many moons. And many crosscurrents and rotations are appearing within the overall market. One rotation is the move out of slow-growing, defensive sectors that had provided market leadership during the first four months of the year, such as consumer staples and utilities, and into faster-growing sectors.

This makes a lot of sense. Revenue growth in the first quarter was slightly negative year over year for the first time since early 2009. In addition, about half of the tepid 3.3% earnings growth recorded in the first quarter was due to stock repurchases. Finally, on Wednesday, the Organisation for Economic Co-operation and Development again cut its worldwide growth forecast for both 2013 and 2014.

In short, growth is hard to find right now, and the market is starting to bid up shares of stocks that can provide solid growth in revenue and earnings. I believe that this trend will continue in the coming months.

Most of my growth portfolio is positioned in the technology and energy sectors, especially in shares of companies that will benefit from the continued robust expansion of domestic oil and gas production. These sectors have underperformed the market over the previous six months and have better growth prospects than the overall market, as well as solid valuations generally.

I noticed the other day that I am significantly underweight the healthcare sector. This is an oversight I am working to correct, as many equities within this space have growth potential. Here are two fast-growing companies in the sector that have reasonable valuations and which I am currently looking at as possible additions to my growth portfolio.

Mednax (MD) provides newborn, maternal-fetal and pediatric subspecialties and anesthesia-care physician services in the U.S. and Puerto Rico. This company is relatively underfollowed, given its $4.5 billion market capitalization. It is also showing rapid revenue growth. Analysts project sales increases of just under 20% this year and more than 10% revenue gains in fiscal 2014. A valuation of 15.5x 2014's projected earnings seems like a reasonable price to pay for this growth.

Jefferies bumped its price target on Mednax to $108 from $95 earlier this week, citing an upcoming bump in Medicaid reimbursement rates in the third quarter and contributions from accretive acquisitions as reasons for moving its price target higher. The stock should also get a nice bump when it is eventually included in the S&P 500 (it already has a higher market capitalization than several components).

Salix Pharmaceuticals (SLXP) specializes in developing and commercializing prescription drugs and medical devices used in the treatment of various gastrointestinal diseases in the U.S. The company should post revenue gains of over 20% for both fiscal 2013 and 2014. Salix is priced at about 13.6x 2014's projected earnings. In addition, consensus earnings estimates for the next two fiscal years have been moving up over the last month, and the stock sports a five-year projected price/earnings-to-growth ratio of under 1 (it's at 0.87).

Jefferies also raised its price target to $70 from $63 a share the other day, and Salix has produced some solid trial results for a new product to treat a form of ulcers and bought the intellectual property rights to the amorphous form of one of its key drugs.

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At the time of publication, Jensen had no positions in stocks mentioned.

TAGS: Investing | U.S. Equity | Healthcare

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