The stock market continues to be overall trendless, since January. From February 3rd to Friday, the Nasdaq has moved 0.10%. From May 9th to Friday, the Nasdaq has moved -0.89%. Not necessarily a market that rewards savvy investors.
The good news is that despite the overall trendless environment, there have been a few sectors making solid gains. One of these sectors is the medical sector. This sector was already doing well before the Supreme Court recently upheld the Patient Protection and Affordable Care Act. Post passage, it has continued to do well.
I want to go over four medical stocks that I am looking to establish a long position in. These stocks are all leading stocks, in their respective industry group, within the medical sector.
What is a leading stock? A leading stock has strong EPS growth, strong sales growth, a high profit margins, a high return on equity, low to zero debt to shareholder equity, mutual fund ownership growth, management ownership, high future EPS estimates, a high Relative Strength line to the overall market, and is within 15-20% of its 52-week high.
All of the fundamentals provided below are from my premium data provider MarketSmith.
First up is Molina Healthcare (MOH). Molina Healthcare is a Long Beach, CA provider of managed healthcare services to 1.7 million members via government-sponsored programs for low-income families.
Molina Healthcare's EPS growth has been spotty but is consistently growing. EPS has grown 4%, 100%, 425%, 41%, 41%, 8%, 31%, and 3% the past eight quarters. Sales growth has been more smooth, growing 8%, 13%, 12%, 16%, 17%, 13%, 21%, and 23% the past eight quarters. Annual EPS estimates for 2012 and 2013 are -46% and 81% respectively.
Molina Healthcare has 29% debt to shareholder equity, a return on equity of 11%, a cash flow of $3.53 per share, and has an annual EPS growth rate of 1%. The P/E ratio is currently at 15 which is in the low end of its 5-year range of 8-34.
Mutual fund ownership has been increasing gradually, growing from 291 to 357 funds, during the past eight quarters. Management currently owns an impressive 11% of the shares outstanding.
Staying in the managed care industry group, next we have Wellcare Health Plans (WCG). Wellcare Health Plans is a Tampa, FL provider of managed healthcare services through government programs such as Medicaid and Medicare to 2.6 million members.
Wellcare Health Plan's EPS is on fire, growing 9%, 51%, 288%, 97%, 142%, 203%, and 100% the past seven quarters. Those gains are being fueled by healthy and steady sales growth. Sales have grown 9%, 11%, 11%, 18%, and 21% the past five quarters. Annual EPS estimates for 2012 and 2013 are for slowdowns of 19% and 4% respectively.
Wellcare Health Plans has 12% debt to shareholder equity, a return on equity of 30%, a cash flow of $7.42 per share, and an EPS growth rate of 2%. The current P/E ratio of 9 is in the mid-low end of its 5-year range of 2-25.
Mutual fund ownership of Wellcare Health Plans is expanding rapidly, growing from 299 to 515 funds invested during the past eight quarters. Management only owns 1% of the shares outstanding. However, 1% is better than 0%. Any vested interest in the company is fine.
Moving over to the systems and equipment side of the medical sector, we have Cantel Medical Corp. (CMN). Cantel Medical Corp. is a Little Falls, NJ developer of infection prevention and control devices used for dialysis, endoscopy and water purification and filtration.
Cantel Medical Corp.'s EPS growth is getting stronger and stronger, growing 6%, -24%, 16%, 12%, 6%, 21%, 32%, and 58% the past eight quarters. Sales have grown 5%, 1%, 22%, 24%, 23%, 30%, 20%, and 18% the past eight quarters. This large growth is expected to continue, with 2012 and 2013 annual EPS estimates for gains of 38% and 22% respectively.
Cantel Medical Corp. has 10% debt to shareholder equity, a return on equity of 9%, a cash flow of $1.30 per share, an annual EPS growth rate of 26%, spends 2.1% of sales on R&D, and provides a 0.3% dividend yield. The current P/E ratio of 28 is in the upper end of its 5-year range of 9-36. Savvy investors know that when it comes to real growth stocks an "expensive" P/E ratio is irrelevant.
Mutual funds have a slow appetite for Cantel Medical Corp., as mutual fund ownership has only increased from 208 to 229 funds the past eight quarters. Management has a major vested interest in making sure the share price continues to rise, owning a whopping 23% of the shares outstanding.
Last but not least, we have Amsurg Corp. (AMSG). Amsurg Corp. is a Nashville, TN operator of 228 ambulatory surgery centers with physician practice groups in 35 states and the District of Columbia.
Amsurg Corp. EPS is just starting to catch fire, growing 2%, 7%, 7%, and 35% the past four quarters. Leading the turnaround in earnings is sales, growing 6%, 7%, 10%, 6%, 7%, 10%, 21%, and 30% the past eight quarters. Annual EPS estimates for 2012 and 2013 are for gains of 18% and 9% respectively.
Amsurg Corp. has 73% debt to shareholder equity, a return on equity of 9%, a cash flow of $2.53 per share, and an annual EPS growth rate of 6%. The current P/E ratio of 17 is in the high end of its five-year range of 8-21.
Mutual fund ownership of Amsurg Corp. has been growing slowly, like Cantel Medical Corp., growing from 265 to 296 funds the past eight quarters. Management owns a healthy 8% of the shares outstanding.
All of these stocks are ready to breakout to new highs and will continue to produce strong gains for investors as long as the earnings and sales growth continues. Once these metrics start to slow, individual investors need to review the situation to make sure the investment still makes sense.
I personally am a trend follower and only want to be long these stocks only when they are moving higher over an intermediate-term time frame.
On that note, I am waiting for Molina Healthcare to produce a pocket pivot point buy signal off the 10 day moving average, now that it is above the 50 and 200 day moving average. If a signal is produced, a new long position will be initiated.
Wellcare Health Plans is short-term overbought but now that it is above the 50 and 200 day moving average a new long can be considered. If the stock can pullback on lower volume toward the 10 and 50 day moving average and then produce a pocket pivot point buy signal off the 10 day moving average, I will being accumulating shares.
Cantel Medical Corp. is the most coiled for a breakout. It is resting near its 52-week high, currently forming a flat base. Any breakout move here on above average volume is a buy signal. I will look for continued buy signals off subsequent pocket pivot point buy signals off the 10 day moving average.
I am already long Amsurg Corp. from a June 15th breakout buy signal. I have added to this position on June 28th, June 29th, and July 9th as it produces pocket pivot point buy signals off the 10 day moving average. I will continue to do this as it trends higher.
If these stocks do not continue to move higher immediately after I purchase them, I will be quick to cut my losses and re-evaluate the trade to see if a future position makes sense. Cutting losses in the stock market is necessary. All of the greatest traders today and of all-time do it. You are going to be wrong a lot in the stock market. Making sure you lose little when wrong will save you from the dreaded ultimate final loss.
Disclosure: I am long AMSG.
Additional disclosure: I may initiate a long position in WCG, CMN, MOH over the next 72 hours.