By Philip van Doorn, MarketWatch
There’s still value to be found in the stock market’s best-performing sector, according to Wall Street analysts, despite the seemingly endless flow of articles saying equities are too expensive.
It’s easy to predict a “correction,” which is typically defined as a broad stock market decline of 10% to 20%. It will happen. I guarantee it. But I don’t know, or care, when it will happen.
Why not? Because a long-term investor is just that — an investor and not a day-trader. If you see value in a company and buy its stock, and then the market dives, would you question your decision to invest? If so, your convictions probably weren’t strong enough to make the investment in the first place.
And if you were confident in your decision, and still are after the market declines, you have an opportunity to scoop up more shares at a discounted price.
Where to look for value
A reason many market observers are worried is that price-to-earnings multiples have climbed so high. The S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.02% trades for a weighted 17.7 times consensus 2015 earnings estimates, among analysts polled by FactSet. The index hasn’t traded that high since 2004.
So you may pay a relatively high price to jump in now. One way to protect yourself is to focus on health-care stocks, because that sector has consistently outperformed all others over just about any time period you consider. The industry has many built-in advantages: We all need it, there are new discoveries and technological improvements every day, and the U.S. population is aging.
Jeff Reeves recently shared a number of health-care ETFs to consider, while calling the sector “your only safe bet in this sickly stock market.”
We discussed one method of picking health-care stocks earlier this week, which was to look at companies’ free-cash-flow yields to identify which ones could most easily raise their dividends. This approach may seem a bit conservative for health-care stocks, but many of the mature players throw off a lot of cash, and consistently raising dividends is correlated to long-term outperformance.
Another interesting approach to identifying which companies merit further research is to see how the sell-side analysts feel about them. To do this, we began with the 154 health-care stocks included in the S&P 1500 Index.
Here are the 10 S&P 1500 health-care stocks with “buy,” or equivalent, ratings from at least half of analysts that have the highest implied 12-month upside based on price targets:
|Company||Ticker||Industry||Closing price - May 27||Consensus price target||Implied upside|
|Anika Therapeutics Inc.||/zigman2/quotes/202637075/composite ANIK||Pharmaceuticals||$32.83||$50.75||55%|
|Air Methods Corp.||Medical/ Nursing Services||$42.31||$59.54||41%|
|Healthways Inc.||Medical/ Nursing Services||$16.16||$22.71||41%|
|Spectrum Pharmaceuticals Inc.||/zigman2/quotes/205199409/composite SPPI||Biotechnology||$6.24||$8.60||38%|
|HMS Holdings Corp.||Services to the Health Industry||$16.56||$22.78||38%|
|Kindred Healthcare Inc.||Hospital/ Nursing Management||$22.64||$30.50||35%|
|Akorn Inc.||Medical Distributors||$42.84||$56.80||33%|
|ANI Pharmaceuticals Inc.||/zigman2/quotes/208876066/composite ANIP||Pharmaceuticals||$51.42||$66.67||30%|
|Cross Country Healthcare Inc.||/zigman2/quotes/207320762/composite CCRN||Personnel Services||$10.47||$13.50||29%|
Anika Therapeutics Inc. /zigman2/quotes/202637075/composite ANIK +1.39% of Bedford, Mass., tops the list. The company makes Orthovisc and Monovisc, which are hyaluronic acid (HA) injection supplementation treatments that provide long-term pain relief for patients suffering from osteoarthritis of the knee.
“The biggest problem the industry has had is to figure out, scientifically, why injecting hyaluronic acid into the knee works,” according to Northland Capital Markets analyst Mark Landy. There was pushback by insurers last year after the American Medical Association said it couldn’t support use of HA to treat osteoarthritis, even though the organization wasn’t against its continued use.
Better news for Anika came in January, when it received a J-code for Monovisc, making it much easier for doctors to bill insurers. In a phone interview on Thursday, Landy said that once Anika’s distribution partner Johnson & Johnson /zigman2/quotes/201724570/composite JNJ -0.28% finishes its planned inventory reduction, Anika should see a bump in revenue beginning in the fourth quarter.