2 Winners to Watch and 1 to Buy Now

What companies are tomorrow's big winners? In our ongoing series, I'm chatting with Fool analysts and advisors to discover the stocks they're watching and the catalysts that would signal it's time to buy.

Today, Motley Fool Special Ops senior analyst Mike Olsen shares two companies on his watchlist and one that he grabbed for himself. (For your convenience, you can now create your own version at MyWatchlist.com, your free customized hub to follow the performance and Fool coverage of the companies you care about.)

Mike likes a mess. If there's confusion and uncertainty in an industry, the value hound in him is confident he can see what the market has missed, especially if many investors are waiting for the smoke to clear. There's a whole bunch of uncertainty in the health-care arena these days, so Mike has his eye on what he characterizes as a health-care-reform fun pack: two companies he's watching and one he's already bought.

Testing the blockbusters
Pharmaceutical Products Development
(Nasdaq: PPDI  ) essentially helps big pharmaceutical companies jump through the regulatory hoops as they take their drugs from clinical trial to (hopefully) market. The company boasts one of the largest networks of testing subjects, and the scale of its business allows companies to run the late-stage tests of their potential blockbusters at a significant savings. Such a savings, in fact, that Merck (NYSE: MRK  ) entered into an agreement last year with Pharmaceutical Products Development to help it with its late-stage trials.

The pharmaceutical industry is murky these days as a result of an unsure economy, pending patent expirations, and merger and acquisition activity. As a result, pharmaceutical companies curtailed research and development and canceled contracts for work with PPDI, and its financial results have fallen off a cliff. But with tens of billions of dollars in drugs coming off patent over the next several years, big pharma needs to find new blockbusters to replace their revenue stream. Mike is optimistic that PPDI will be the business to help those companies take their drugs from the lab to the pharmacy.

Knees to know
Zimmer Holdings
(NYSE: ZMH  ) makes knees. "We're both runners, so we both know that our knees are in a perpetual state of decline; they never feel better the next day," Mike tells me. Although we're both optimistic that we'll be able to avoid knee replacements down the road, we're aware that there are a lot of overweight people in this country who put more pressure on their joints than they can handle. As the population ages (and gets bigger), the demand for Zimmer's products will grow.

Mike sees the knee-replacement business as essentially a duopoly with Zimmer and Stryker (NYSE: SYK  ) as the kings, and they both enjoy substantial moats. Once a surgeon is comfortable installing a Zimmer knee, he's not going to want to switch and risk a botched surgery. And with excellent secular tailwinds, both have reasons to expect growth. But Zimmer's cheap, according to Mike.

"It's priced as though cash flow to earnings will never grow again," he says. "The cheapness isn't entirely unwarranted. By virtue of being a pure play on knees, it's more exposed to Medicare reimbursement than Stryker, and health-care reimbursements will decline with the recently passed health-care legislation. But it's an outstanding business and, let's face it, the need for knee replacements isn't declining."

And the one he bought
Still-high unemployment combined with an acquisition that many deemed exceedingly pricey has led to tough times for AMN Healthcare Services (NYSE: AHS  ) , a company that provides temporary health-care staffing -- mostly nurses and a small but growing pool of physicians. An industry leader with a record of creating profits, AMN aims to help medical providers efficiently and cost-effectively manage their supplement staffing. Adding NurseFinders, which provides home care, was a great strategic fit, says Mike, but the market blanched at the purchase -- the stock at one point was down more than 50% on the year, although it's rebounded somewhat since its lows.

But Mike thinks the acquisition will look much more reasonable in retrospect, and even if it doesn't, the shares still look cheap. Moreover, the company will benefit greatly as the economy improves, and should get a boost from health-care reform. Put it all together, and Mike projects the stock can climb from its current value around $6 to as much as $12 per share. As the Motley Fool Hidden Gems team wrote when they followed Mike's suggestion to buy shares (twice), "Wall Street seems to have abandoned all hope of returns, which is exactly why we think there's still substantial value in AMN, and we're glad to have the opportunity to double down. Often you will get your best returns from adding on dips to stocks you already own."

And that's why it pays to watch. You can make smarter investing decisions with your own version of My Watchlist, new and free from the Fool. Click below to start following one of the stocks mentioned above:

Roger Friedman doesn't own shares of any companies mentioned, but they're all now on his watchlist. Stryker is a Motley Fool Inside Value pick. Pharmaceutical Product Development is a Motley Fool Stock Advisor choice. The Fool owns shares of AMN Healthcare Services. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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