Jim Cramer's Favorite Healthcare Stocks

by: Insider Monkey

Jim Cramer’s stock picks tend to outperform the market on the average. We believe investors especially benefit if they focus on his picks in historically conservative sectors where the risks and momentum are lower. Healthcare is one of the sectors with above average performance during the past decade.

Cramer has been careful in recommending healthcare stocks because of impending regulations and fallout from changes in healthcare. During the month of August, however, the healthcare stocks he recommended on “Mad Money” were as follows:

1. Bristol-Myers (NYSE:BMY): Cramer recommended buying Bristol-Myers because it is a takeover target whose fundamentals are solid. The pharmaceutical company also has some new drug discoveries and their skin cancer medicine is selling well. Cramer also like BMY because of its high dividend yield. Jim Simons loves dividend stocks and has a large position in BMY (see billionaire Simons’ top stock picks).

2. Allergan Inc. (NYSE:AGN): Cramer generally doesn’t recommend pharmaceuticals in this environment because they ultimately depend on government spending around the world for growth and that spending may not be available going forward. About one-third of the company’s franchise is cash paid.

Cramer noted the stock as a buy, stating it is one of the few growth pharmaceuticals available (primarily a result of their massive R&D spending). The medical aesthetics company reported excellent quarterly earnings of 96 cents per share.

3. CareFusion Corp. (NYSE:CFN): A spin-off of Cardinal Health, CareFusion is actually a collection of healthcare companies whose aim is to help hospital administrators be more cost-effective. They own a diversified portfolio of great brands and are sitting on $1.2B in cash. The stock currently trades at 12.4 times earnings.

CEO Kieran Gallahue said that around the world, countries are trying to reduce healthcare costs, and this something our company helps them to do. Cramer recommends getting in on this stock now because he feels it’s one that will be heavily talked about in the coming years. David Einhorn has the largest stake in CFN among the 300+ hedge funds we are tracking (check out Einhorn’s top stock picks).

4. Edwards Life sciences (NYSE:EW): This medical device company is a defensive company that will not only hold up in this tough market, but is also poised to increase by 30% should the FDA approve a device that prevents open-heart surgery (for heart valve replacement). The device is already approved in Europe and has already passed a preliminary FDA panel with a 9-0 vote in favor.

Because the company already has a solid product pipeline, Cramer feels the downside is only about 10%, should the FDA not approve the device. Although the stock sells at 24 times earnings, the price fell far enough over the last month that it offsets the risk involved with the impending FDA decision.

5. Covidien (COV): Cramer gave COV a buy recommendation as it is one of the cheapest healthcare companies around. Covidien has a $26 billion market cap. The stock currently trades at 13 times earnings and yields 1.5%. Steve Cohen’s SAC Capital initiated a brand new $100 Million position in this stock during the second quarter (see billionaire Cohen’s favorite stocks).

6. Medco Health Solutions (NYSE:MHS): With a deal for a potential buyout on the table, Cramer recommended buying the pursuer, Express Scripts (NASDAQ:ESRX), and not Medco. This way, if the deal is blocked by the Justice Department, you’ll be stuck with bad stock. If the deal goes through, however, you’ll be left with a powerhouse of a company. Cramer’s charitable trust owns (ESRX).

7. Sanofi-Aventis (NYSE:SNY): Cramer again recommended buying this high-yielding pharmaceutical with a low valuation. The stock currently yields 3.8% and is trading at around 7 times earnings. Ken Fisher of Fisher Asset Management owns over 13M shares (see more of Fisher’s picks here).

8. ARIAD Pharma (NASDAQ:ARIA): Cramer endorses this stock for speculation purposes only, as he likes the anti-cancer drugs as well as the amount that the price has come down to. The stock closed at $9.95.

9. Pfizer (NYSE:PFE): A viewer that inherited a large amount of this pharmaceutical wanted to know if he should dump his whole position. Cramer, while not a fan of the stock, said it’s stable enough right now and that it should be worked out of the portfolio over time. Pfizer has a $148 billion market cap and yields 4.2%.

10. Merck (NYSE:MRK): Cramer did say, however, that companies like Pfizer and Merck are prime examples of secular growth companies that are positioned to do better in down markets compared to cyclical growth companies.

Merck has a $101 billion market cap, a 4.6% yield and trades at 34 times earnings. David Tepper of Appaloosa Management reduced his position by 6% (see more of Tepper’s holdings).

11. Health Care REIT (NYSE:HCN): Although it has been hammered, Cramer calls this REIT a buy. They know there is going to be some retrenchment from Washington, but they have some cushion to withstand it. Health Care REIT has a $9 billion market cap and yields 5.6%.

12. Stryker (NYSE:SYK): Cramer’s charitable trust recently initiated a new position in Stryker, purchasing 1,000 shares. Stryker is a global medical technology company that specializes in orthopaedics and other medical specialties. The company has a $19 billion market cap, trades at 15 times earnings and yields 1.5%.

13. Perrigo (NASDAQ:PRGO): Referred to by Cramer as the “best knock-off company known to man”, he feels they should report a good quarter next week. This generic drug maker has an $8.85 billion market share and is trading close to its 52-week high of $97.29 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.