Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



3 Health Care Stocks Wall Street Is Buying

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Playing follow the leader is often a good way to generate outsized returns in the market. But if you aren't sure why Wall Street is buying a certain stock, you may find yourself following them on their rare mistake.

So with that in mind, here's my take on why Wall Street is piling into these three health-care stocks.

Envision Healthcare Holdings (NYSE: EVHC  ) is the top health care pick by Wall Street this year, after institutions have increased their holdings by 44% year to date. So why is Wall Street enamored with Envision Healthcare? First off, Envision is a highly diversified medical service provider, and as such, the company is positioned to actually benefit from the coming changes in health coverage next year. Specifically, Envision owns Evolution Health, which specializes in caring for chronically ill patients that will receive broader coverage under the Affordable Care Act.

Most importantly, Envision has been an absolute cash cow of late, increasing revenues by 16.5% last quarter compared to a year ago. In sum, the company is generating nearly $4 billion in revenues per year, and looks to grow earnings another 80% next year. If that projection turns out to be even close to correct, Envision should blow away its peers in terms of earnings. So you may want to dig deeper into Envision.

Opko Health (NASDAQ: OPK  ) is also being gobbled up by Wall Street this year, with a 42% increase in institutional holdings. Even more impressive is the fact that insiders have increased their holdings by over 200% this year. So insiders and many on Wall Street appear to hold a similar rosy outlook for the company going forward

Yet, there is considerable debate over Opko's valuation. With a market cap currently exceeding $3 billion and revenues that will only barely top $100 million this year, it's not hard to understand why. In short, there is a major discrepancy between Opko's current valuation and its underlying business.

Looking ahead, Opko could possibly bridge this valuation gap next year by increasing revenues through a diversity of new products, such as its next generation prostate cancer screener 4K Score. That said, I don't like investing in stocks that are trading on potential, and believe fellow Fools would be wise to avoid following Wall Street's lead on this one.

Taro Pharmaceutical Industries (NYSE: TARO  ) takes third place in Wall Street's heart this year, after institutions increased their holdings by a respectable 17%. And Taro shares have doubled in price for the Street's troubles.

Even so, institutions have still only taken a tiny stake in this specialist biopharma company, holding a measly 6.8% of outstanding shares. With Taro nearly doubling its sales by 27% to $205 million last quarter compared to a year ago, and announcing what amounts to a share buyback program, I'm surprised the Street hasn't taken a larger position in Taro. Moreover, the company currently has twenty products under regulatory review at the FDA, giving Taro numerous shots on goal next year.

Although Taro is only expected to grow earnings by 7% next year, I am a fan of its buyback program, its commercial portfolio, and its impressive array of drug candidates. As such, you might want to keep tabs on this one.

Foolish takeaways
Going with the crowd can sometimes be a good idea when investing, especially when mimicking tried and true all-star investors. And following Wall Street on its top three health care picks this year would have more than doubled your money in each case. Yet, I believe there are clear and present dangers to this strategy. In the case of Opko Health, Wall Street has created a valuation gap that has yet to be filled by the company's various clinical candidates. My take is that this discrepancy may cause Opko to be a laggard in the sector going forward.

By the same token, a peak into Wall Street's cup boards does reveal the gems of Envision Healthcare Holdings and Taro Pharmaceuticals -- both of which look like they will outperform again next year. So I do think its worth taking a look at what Wall Street is buying, but it's never a good idea to follow them blindly when making investing decisions.

The Motley Fool's top stock for 2014
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2778551, ~/Articles/ArticleHandler.aspx, 9/26/2016 5:07:32 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:02 PM
EVHC $21.35 Down -0.10 -0.47%
Envision Healthcar… CAPS Rating: ****
OPK $11.06 Down -0.03 -0.27%
Opko Health CAPS Rating: ***
TARO $116.39 Down -1.36 -1.15%
Taro Pharmaceutica… CAPS Rating: ****