Investor Checkup: Rising Medical Costs Lead to Healthcare Growth Opportunities

by: Erik Dellith

Inflation edged higher last month, but a key propellant behind the bounce in consumer prices - rising medical costs - may hold a silver lining for investors. According to the Reuters stock screens, the healthcare sector, which runs the gamut from drug makers to medical services, offers mostly growth opportunities. Investors favoring value or solid-quality companies, however, won't be left out in the cold.

Of the 473 companies that recently came across the Reuters Select stock screens, 43 names were from the healthcare sector. (Click here for an Excel sheet comparing these companies.) That is still a large swath of firms to choose from, but some further filtering narrowed the field.

The healthcare arena is made up of companies that provide biotechnological and pharmaceutical products and medical devices, while other companies operate healthcare facilities. According to the Bureau of Labor Statistics, prices for drugs and medical supplies rose 0.6 percent in January, faster than the overall CPI of 0.2 percent but still slower than the 0.9 percent increase for medical care services. For this reason, we decided to concentrate on healthcare facilities, where patients can receive different types of medical services. This shortened our list to a much more manageable seven companies.

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A careful eye will notice that all but one of these companies appeared on a growth screen. Metropolitan Health Networks, Inc. (MDF) registered on the quality screen for Fastest Turnover, thanks largely to its industry-leading turnover ratios.

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Further, Amedisys, Inc. (NASDAQ:AMED) not only landed on the growth screen for Sales Growth Leaders, but, thanks to key factors like relatively cheap valuation metrics, it was also the only company to meet the criteria of a value screen. Its below-industry-average price to earnings [P/E] and P/Sales ratios helped the company land on the Favored Value Plays screen, and its generally favorable analyst recommendations solidified its placing.

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Still, growth-oriented investors should notice that LHC Group, Inc. (NASDAQ:LHCG) and NightHawk Radiology Holdings, Inc. (NHWK) joined Amedisys on the screen for Sales Growth Leaders, thanks primarily to their superior top-line improvement.

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Investors who like to focus on companies where analysts have been upping their earnings estimates might want to take a look at Laboratory Corp. of America (NYSE:LH), which recently appeared on the screen designed to highlight such stocks. The Rising Expectations screen starts off by filtering for companies that have beaten analyst estimates in each of the last four quarters.

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The screen then zeros in on firms for which analysts have been revising upward their earnings estimates for the current year. Analysts have, indeed, been busy penciling in higher estimates on Laboratory for both 2007 and 2008. Two months ago, the consensus estimate for 2007 stood at $3.88, but today it is $4.03. The mean estimate for 2008 over the same period has climbed from $4.33 to $4.60.

Finally, investors looking for stocks that have escaped Wall Street's attention might want to take a look at Advocat Inc. (AVCA) and Health Fitness Corp. (NYSE:FIT), both of which landed on the screen for Lesser Known Stocks. Some companies don't deserve much attention and rightly don't get it. Others, however, are relatively solid firms that have just been ignored. This screen helps differentiate between the two by requiring that companies have industry-leading earnings growth. The key requirement, however, is still that a company must be relatively ignored. The screen starts out by requiring that a company must be followed by six or fewer analysts. At present, only one analyst provides earnings estimates to Reuters for Advocat, while two share insight for Health Fitness.

It is not enough for a company to have only light analyst following, it must also be ignored by money managers. The screen also requires that institutions own less than 50 percent of the outstanding shares. But money managers can also take light positions in entire industries. To make sure that we are highlighting little-followed companies in industries that money managers might be relatively avoiding at the time, the screen also requires that institutional ownership must be no more than 80 percent of the industry average. On average, money managers currently own about 61 percent of outstanding shares of companies in the healthcare facilities industry. Yet, professional money has picked up only 16.3 percent of Advocat and 9.6 percent of Health Fitness.

It is important to note that a one-month spike in the CPI does not make a trend, and it is similarly important to realize that there is nothing to indicate that any one of these companies will be able to match the price increases noted in the government's inflation report. But if you're looking to develop portfolio ideas, this is a good example of how to marry news and stock screening.

Disclosure: At the time of publication, Erik Dellith did not directly own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by