Investing With the Consumer Spending Trends

The personal savings rate in the U.S. has been underwater for an alarmingly long time. For some people, that means it's high time to think about cutting back on their spending and making sure a few bucks find their way to the bank. For investors, though, it's a good time to scope out where all this extra money is going.

As I pointed out in a previous article, spending on gasoline, housing, and medical care makes up a large portion of Americans' total expenditures, and these sectors are growing at a speedy clip. Because health care is by far the largest of the three spending areas, and it's less cyclical than the other two, I decided to concentrate primarily on that. To find some good investing ideas, then, I headed over to The Motley Fool's new CAPS service. Among the many features in CAPS is one called Tags. CAPS Tags are collections of stocks grouped according to certain qualities they share (for example, Michigan, property management, and anti-virus).

Minding medical care
As an investor, it's hard to ignore an industry that's sucking up $1.6 trillion in personal income and growing at 6.7% per year. Two of the fastest-growing subsegments of medical care are medical laboratories and health insurance -- both of which have tags in CAPS. Here are a few companies in those areas that have gotten the thumbs-up from CAPS players:

For reasons outside of business, it's been a rocky road lately for health-plan behemoth UnitedHealth. But with the stock-option backdating scandal now more or less behind it (though it still needs to restate past financials), the company is hoping to get back to its actual business of selling health-care plans and services. Preliminary results look promising, but the proof will be in the pudding for new CEO Stephen Hemsley.

As far as investor sentiment is concerned, Warren Buffett recently purchased some UnitedHealth shares. This is the stock-market equivalent of getting Paris Hilton to come to your birthday party -- no matter what everyone thought of you before, you're suddenly going to become a very popular guy. The company is known for spitting out gobs of cash, and that cash is currently building up on the balance sheet, because UnitedHealth can't start buying back shares again until it's square with the SEC. Although Buffett isn't perfect -- his currency bets have had mixed success -- you don't get referred to as a "legendary investor" by consistently picking lousy stocks.

Let the lab have a look at your portfolio
Have you ever given a doctor a blood sample to send off for tests? Or maybe you've had to submit a fluid sample for a drug test, perhaps for a new job. It's diagnostic medical labs that take care of such things. For the medical profession, these labs are great -- they allow for quicker, more accurate diagnoses, meaning doctors can start patients on a correct treatment path sooner. For investors, the industry offers nice margins, decent growth, and the ability to snap up smaller labs relatively easily.

Diagnostic lab Quest Diagnostics has been under pressure since September, when UnitedHealth pulled its contract and the stock got cut to the tune of 18%. Even without that one big contract, it's trading at 16.8 times 2006 EPS, and CAPS players seem to think Quest still has some juice. For obvious reasons, analysts are looking for 2007 results to come in below 2006, but growth is expected to resume in 2008.

In the company's most recent 10-K, it said it only had three customers that accounted for 5% or more of overall revenue, and none that accounted for more than 8%. At that time, the company believed that the loss of any one of its customers would not materially harm Quest's financial condition or operating results. The coming year should be a litmus test of that assumption.

On the other side of the UnitedHealth switcheroo is Laboratory Corp. Though a good deal smaller than Quest on a revenue basis, Lab Corp. has shown itself to be an able competitor, and it will likely continue to bolster growth through acquisition as both companies further consolidate the industry. Lab Corp. is currently trading at a 25.2 P/E multiple on expected 2006 earnings, but Wall Street is projecting a big year for the company in 2007.

An experienced investor who does a lot of homework can usually pick out a good stock or two in even the worst industries, but the odds go up significantly when you work with industries moving in the right direction. Right now, there's a good deal of uncertainty about companies involved with housing and petro, but medical care looks like it's poised to continue raking in cash.

Wall Streeter Piper Jaffray thinks Lab Corp. has what it takes to keep moving on up. You can check out all the picks from Piper's research department in CAPS.

Fool contributor Matt Koppenheffer is currently ranked 6,125 out of 22,796 in CAPS, and you can check him out as the super-villain TMFKopp. He owns shares of UnitedHealth. UnitedHealth, Coventry Health Care, and Laboratory Corporation are Motley Fool Stock Advisor picks. UnitedHealth is also an Inside Value choice. The Fool's disclosure policy has been lab-tested and insured for your reading pleasure.