Healthcare Investments That Offer Growth and Safety

We’ve had quite a spring rally in the last two months. It’s hard to believe that the S&P 500 has rallied as much as 40% since the panic levels in March, and many individual issues have given investors chances to double or triple their money in just a few short weeks. We are now beginning to hear whispers of economic recovery and new bull markets. (Actually, by definition, this latest rally constitutes a bull market because it exceeds a 20% gain - but don’t try to explain that to investors who are still 41% below the October 2007 high).

At ZachStocks, we have had plenty of opportunities to participate in the gains along the way. Continental Resources, Inc. (CLR) has risen 117% since our post in early March. Intrepid Potash, Inc. (IPI) was also a recommended long position and has returned 93% since our discussion. And The Blackstone Group L.P. (BX) has risen 147% since we discussed the company just after the rally began. At the time, the opportunities for aggressive trades were very clear. However, today’s market is getting to the place where the risk begins to cloud the picture. In the ZachStocks Growth Model we are taking some of our investment capital off the table, and looking toward some more defensive positions to protect our gains.

Healthcare Investments Offer Safety

One of the most attractive opportunities for relatively safe investment opportunities is the healthcare market. Not only is medical care considered an essential service (you wouldn’t refuse to treat a broken arm just because you didn’t have the money to cover it), but there are also political and social changes that are lining up to create new opportunities in healthcare investments.

Now a word of caution here: Not all medical stocks or healthcare companies are worthwhile investments. Proposed cuts to Medicare payments, excessive competition in particular sectors, and financial instability make some healthcare investments very dangerous. Many large drug companies and device makers are seeing patents expire and may have trouble competing with generic reproductions of their blockbuster hits.

At ZachStocks, we spend much more time looking for opportunities in smaller and often undiscovered companies. These firms often have a lock on a specific niche which helps them to avoid price wars, and usually management has a hungry, entrepreneurial spirit which leads to much more attractive growth.

Currently, there are three specific areas of the industry which offer stability, growth, and attractively priced opportunities. While we mention a couple of specific companies in each of these categories, there are certainly many more niche providers in each area that can be researched and bought today, in order to yield hefty profits in the months to come. Please comment and share your ideas for specific healthcare investments which offer both growth and safety.

Long-Term Care

It’s no secret that our population is becoming skewed towards an older demographic. Healthcare facilities that cater to the elderly are not only seeing the addressable market expanding, but are also able to count on the government to help patients make the payments for this care.

While the Obama administration is currently reviewing and making changes to Medicare reimbursement plans, the bottom line is that long-term care will be made available to the majority of Americans and it is just the details that are being worked out. Certainly, there is risk that the payments will be lower than previous plans have allowed, but the industry should continue to be strong and offer opportunity.

Of particular note, Amedisys, Inc. (AMED) is expected to post strong growth due to its aggressive acquisition campaign and the niche it has adopted. The company provides in-home nursing care which is seen as a positive for Medicare because it allows even acute patients to avoid long-term expensive hospital stays. At the same time, the company has a strong financial position with exceptional debt management which allows them to buy out competition at attractive levels. The combination will likely lead to above average profit growth over the coming years, and investors will likely be well rewarded.

A second long-term care opportunity is The Ensign Group, Inc. (ENSG) which holds a portfolio of medical care facilities across the Western United States. The company is using weakness in the economy to pick up new facilities at extremely attractive prices. The last quarter saw earnings grow by 23%, and analysts expect double digit growth for years to come. Yet the stock is still trading at a relatively low multiple, offering an attractive spot to begin an investment.

Opportunities in Diagnostic Companies

Medical diagnostic firms have an attractive investment profile as well. While large companies like Laboratory Corp. of America Holdings (LH) and Quest Diagnostics Incorporated (DGX) command a large portion of the market share, these multi-billion dollar firms have much less room to grow than a small niche firm with a specific focus, and a strong reputation.

When looking at diagnostic firms, the opportunity appears to be much better when companies sell consumable reagent products instead of the machines that do the heavy lifting. While profit margins may be a bit higher on the equipment (and the price tags are certainly eye-popping), I would rather own a business which continues to make reliable profits month-in and month-out selling the supplies that are used up during the course of providing service to patients.

China Medical Technologies, Inc. (CMED) fits this category well as the company has committed itself to the consumables side of the business by selling it’s HIFU (High Intensity Focused Ultrasound) business line. In addition, CMED recently purchased a new technology called Surface Plasmon Resonance (or SPR Technology) which should provide a robust source of growing revenue.

Another attractive opportunity in diagnostics is Genoptix, Inc. (GXDX) which serves oncologists and handles bone marrow samples. Since these samples are so difficult and painful to get from patients, physicians want to make sure they can trust the diagnostic company to handle the test carefully. There would be nothing worse than asking a patient to endure another episode because the original sample was lost. Genoptix’s perfect track record allows the company to offer a premium service and charge a price that allows for a healthy profit.

Medical Record Keeping

The final area we are interested in is the medical record keeping industry. The Obama administration has earmarked (or should I use another term) a significant amount of stimulus dollars toward establishing a national medical record database. Companies who are able to help with the technology for this project stand to reap significant profits.

Quality Systems, Inc. (QSII) is one of the leaders in this area and while the stock has increased sharply over the last few months, the long-term opportunity certainly makes the company worth looking at. Recently, Quality Systems announced that customers who bought their “Software As A Service” product would be in compliance with government regulations for the duration of their relationship with QSII.

Many investors are also interested in AthenaHealth, Inc. (ATHN) which also offers record keeping services for medical practices. Unfortunately, this stock appears to be over-priced for the amount of money the company earns, and could be vulnerable to a sharp decline in the stock price. It may actually make sense to set up a pairs trade where one could buy QSII and short an equivalent amount of ATHN in order to benefit from the outperformance of Quality Systems over the long-term.

In conclusion, the medical industry offers an attractive place to put investment capital that allows some shelter from the volatility seen in our present economic cycle. While not risk-free, the industry operates on a somewhat detached playing field and offers diversification from more traditional growth investment programs.

Disclosure: Author has positions in many of the stocks mentioned in the ZachStocks Growth Model as well as in portfolios managed by Sound Counsel Investment Advisory.

Comments

[Rohan C. Pease:]

Great article - very timely

ATHN will benefit greatly from the conversion of health care records to electronic data, overhead costs for the doctor are low compared to their competitors. Kind of like how Visa is beneifting greatly from conversion of cash and check to debit and credit. Sorry, couldn't help myself, I just returned from a Payment/Treasury conference in NY which confirms the trend is intact. Again $72 is a level to short V, as the battle between hedgies and Mutual funds will emerge this quarter in Visa.

May 11 03:13 PM

[Rohan C. Pease:]

I do like the pair trade angle, great point, ATHN is a bit rich here.

May 11 03:14 PM

[medallionstock:]

I agree. Nice article that provided a good overview of what is going on in the healthcare industry and healthcare stocks. According to a Yahoo source, Healthcare REITs should see upside due to the Administration's recent legislation. Stocks that stand to benefit are those that care for the elderly, and provide outpatient services. Take a look at Yahoo Finance:
finance.yahoo.com/news...

Sep 23 11:47 AM

[medallionstock:]

Great article about the Health care industry and Health care stocks. Medical REITs should stand to benefit considerably due to the Obama administration's recent legislative policies. Yahoo Finance has a great source on that information:
finance.yahoo.com/news...

Sep 23 11:51 AM