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Historically, value stocks outperformed growth stocks on the average. The reason is simple. Analysts usually expect value stocks to grow at low or even negative growth rates. Therefore, it is relatively easy for value stocks to beat these expectations. Growth stocks, on the other hand, usually have high growth expectations. Analysts often estimate growth stocks to grow at higher rates, making it much harder for growth stocks to beat these challenging expectations. Therefore, contrarian investors who pick low growth stocks over high growth stocks are usually rewarded.

Below, we ranked U.S. healthcare companies based on their expected five-year growth rates. All companies have at least $10 billion market cap. The data is sourced from Finviz. Contrarian investors should focus on the stocks that are at the top of the table.

Company

Ticker

Forward P/E

EPS growth

Eli Lilly & Co.

LLY

12.29

-7.43%

Bristol-Myers Squibb Company

BMY

16.33

-0.56%

Pfizer Inc.

PFE

9.48

2.84%

Merck & Co. Inc.

MRK

10.21

4.88%

Johnson & Johnson

JNJ

12.53

6.17%

Medtronic, Inc.

MDT

10.74

7.58%

Amgen Inc.

AMGN

11.79

7.97%

Abbott Laboratories

ABT

11.11

8.80%

Humana Inc.

HUM

11.55

8.89%

Becton, Dickinson and Company

BDX

12.23

9.53%

Baxter International Inc.

BAX

11.43

9.58%

Zimmer Holdings, Inc.

ZMH

10.76

9.77%

WellPoint Inc.

WLP

9.26

9.87%

HCA Holdings, Inc.

HCA

7.12

10.06%

Cigna Corp.

CI

8.21

10.08%

Biogen Idec Inc.

BIIB

18.66

10.11%

St. Jude Medical Inc.

STJ

10.95

11.02%

Stryker Corp.

SYK

12.9

11.28%

Unitedhealth Group, Inc.

UNH

9.61

11.72%

Aetna Inc.

AET

8.59

12.03%

Thermo Fisher Scientific, Inc.

TMO

10.83

12.70%

Allergan Inc.

AGN

20.85

13.46%

Gilead Sciences Inc.

GILD

11.51

15.78%

Express Scripts Inc.

ESRX

14.3

18.02%

Pharmasset, Inc.

VRUS

20.00%

Intuitive Surgical, Inc.

ISRG

26.8

20.85%

Celgene Corporation

CELG

15.78

24.43%

Alexion Pharmaceuticals, Inc.

ALXN

44.59

34.82%

It seems that expectations about Eli Lilly & Co are really pessimistic and the stock may outperform the market significantly if it manages to maintain its EPS. Analysts estimate its EPS to decline at 7.43% per year over the next five years. Therefore, LLY will be able to beat the expectation as long as its earnings do not decrease at over 7% annually. LLY has a market cap of $46B and a P/E ratio of 9.5. Its forward P/E ratio is still relatively low: 12.29. For the third quarter of 2011, Eli Lilly reported net income of $1.2 billion, compared with $1.3 billion for the same quarter of 2010. As of September 30, 2011, there are 25 hedge funds with LLY positions. For example, Billionaire Jim Simons' Renaissance Technologies reported owning $262 million worth of LLY shares.

Bristol-Myers Squibb Company also has negative growth estimate. Analysts expect BMY's EPS to decline at 0.56% per year in the next five years. Therefore, as long as the company's EPS does not decrease, it will beat the analysts' expectation. For the third quarter of 2011, Bristol-Myers Squibb reported net income of $969 million, up from $949 million for the same quarter of 2010. As of September 30, 2011, thirty-five hedge funds disclosed owning BMY. Jim Simons is bullish about BMY as well. His Renaissance Technologies had $177 million invested in BMY. Roberto Mignone's Bridger Management also initiated a brand new $42 million of BMY during the third quarter. BMY has a market cap of $55B and a forward P/E ratio of 16.33.

One mega-cap healthcare stock with high upside potential is Pfizer Inc . It has a market cap of $168B and its EPS is expected to grow at 2.84% annually over the next five years. PFE also has a low forward P/E ratio of 9.48. Pfizer is a research-based global biopharmaceutical company. For the three months ending October 2, 2011, the company reported net income of $3.7 billion, up from $866 million for the same period a year earlier. PFE is very popular among hedge funds. There are 74 hedge funds with PFE positions at the end of September. Ken Fisher is the most bullish hedge fund manager about PFE. Fisher Asset Management had $389 million invested in PFE at the end of the third quarter.

We like healthcare stocks. The healthcare spending and costs are rising. National Health Expenditures as a share of GDP is expected to be 19.6% by 2019. We think healthcare stocks will continue to be in the portfolios of many hedge funds in the future. We encourage investors to do some in-depth research on the healthcare stocks with high upside potential and consider purchasing some of these stocks for their own portfolios.

Source: Top Healthcare Stocks With The Highest Upside Potential