Going south of the border to add some healthy stocks
There are many more health care stocks in the U.S. than in Canada, and they’ve performed well, says a U.S. advisory that has four buys.
“Thank goodness we’ve got our health.”
You hear that phrase a lot, but sometimes it seems to mean different things in the United States and Canada.
Despite the attempts at health care reform — now being challenged by a Republican-dominated Congress — the U.S. still runs an essentially private system of care.
One could debate the relative merits of the two systems at great length, but today we look at it from the investor’s point of view.
Canada has a tiny number of pharmaceutical and health care stocks. America has plenty of them.
And many advisers will tell you that the portion of your portfolio devoted to U.S. stocks should have a generous helping of stocks that are hard to find in Canada.
This also happens to be a time when U.S. health care stocks have been doing well, says one Wall Street advisory.
In fact, says Dow Theory Forecasts, health care’s “mix of growth an defensive characteristics has historically equated to solid stock returns.”
And in the past year those returns have been more than solid. It examines the situation and recommends four health care stocks.
14 per cent profits
In rolling 12-month periods (that is, annualized average returns by year) since 1995, the average health care stock in the S&P 500 Index returned 14.9 per cent.
That’s well above the index’s return of 12.7 per cent, says this advisory, and higher than nine of the 10 sectors in the index.
The advisory stops short of promising that health care will continue to surge ahead like this, but it likes what it sees.
Per-share profits for health stocks are expected to grow by 8 per cent in the current fiscal year, and 14 per cent next year.
The advisory then turns directly to its four stocks, beginning with a silk dealer who had to treat urinary problems.
His own first customer
In the early twentieth century, Mr. Charles Russell Bard imported French silks to the U.S. In 1907, he began trading in Gomenol, a plant known for its ability to reduce inflammation. He used it to treat his own urinary discomfort, caused by tuberculosis.
Thus he was the first customer of Bard’s (NYSE-BCR), which is now the pre-eminent urology firm in America. It turns out products like the Foley catheter and a device to remove kidney stones.
It is also the featured stock, or “Analyst’s Choice” in this issue. In 2010, this firm sold more than 8,000 products in over 100 countries.
From 2001 to 2008, sales grew by 11 per cent annually and per-share earnings by 18 per cent. In the last two years, those figures have slipped to 5 per cent and 12 per cent, respectively. Still not bad, but Bard’s has stepped up research and development to recoup those earlier successes.
Per-share profits should grow 14 per cent this year, and possibly more if hospitals increase orders. The company also adds to the value of its shares with frequent share buybacks. It’s a Buy and a Long Term Buy (best buy over the next 24 months), says the advisory. The stock trades at $95.26 and yields 0.8 per cent on its $0.72 dividend.
Three more buys
Agilent Technologies (NYSE-A) straddles the health care and technology sectors with its testing equipment. Half of its revenues come from testing semiconductors, smartphones and the like, most often for the defense and aerospace industries.
The other half comes from chemical analysis and life sciences, with devices to study diseases and test drug safety. The company expects drug companies to replace a good deal of equipment in the next year.
The advisory likes this stock a lot and makes it a Focus List Buy (best buy for the next 12 months) and a Long Term Buy. The stock has risen from less than $30 to $44.31 in the past six months. It pays no dividend.
St. Jude Medical (NYSE-STJ) makes pacemakers and other medical devices. The weak job market in the U.S. is lowering demand for elective medical procedures, which has not helped short-term results.
But hospitals are replacing outmoded equipment such as implantable defibrillators and St. Jude is turning out new devices like one to deal with migraine headaches. The shares hit a five-year high at $50 in February, yet still trade at just 16 times trailing earnings. The stock is a Long Term Buy at $48.14 and yields 1.7 per cent on a dividend of $0.84.
Varian Medical Systems (NYSE-VAR) has about 60 per cent of the world market for radiation oncology. With an aging population and the relentless rise of cancer diagnoses, it is growing steadily.
Sales should grow by 10 per cent in 2011, says the advisory, while the firm’s order backlog stands at $2.21 billion, up 10 per cent over last year.
With a share buyback plan in place, per-share earnings should rise by 16 per cent in the March quarter. This stock is a Buy and a Long-Term Buy. It trades at $66.04, with no dividend.
Canadians often shake their heads at the steep costs of health care south of the border. But that in itself is one thing that makes America’s health care stocks an interesting prescription for Canadian portfolios.
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