The Impending Health-Care Boom

Be a doctor or a lawyer, my parents said. People are always getting sick or suing each other. Too bad I didn’t listen.

But I can still take their advice with regard to stock investing. I don’t know how to take advantage of the fact that people are always suing each other. But there are certainly ways to invest with the understanding that people are always getting sick.

Aging population
It’s no secret that people in our society are living longer than ever before. In fact, the fastest-growing segment of the world’s population is 65 and older. Combine this with the fact that, in the U.S., an enormous population bubble called the baby boomers is just beginning to hit retirement age, and we have a catalyst to dramatically increase demand for health care.

Health-care stocks take advantage of perhaps the most obvious and unmistakable trend in our society: Older people need more health care, and they are more numerous and represent a greater percentage of society than ever before. In addition, as developing nations become wealthier, their large populations will demand more and better health care. Just like a surfer positions himself in front of an oncoming wave, investors should position themselves in front of the oncoming increase in health-care spending.

Find some winners
A great way to scan the health-services universe for stocks with the most desirable qualities is with the screener on Motley Fool CAPS. Stocks rated five stars by the 110,000-plus members of the CAPS community have thus far outperformed the market by an astounding margin.

I scanned five-star health-services stocks for the following criteria:

  • EPS growth rate of at least 20% (signifying a fast-growing company)
  • Return on equity above 20% (meaning it’s well-run with a good balance sheet)

Company

CAPS Rating (out of 5)

Sector

EPS Growth Rate (last three years)

Return on Equity

P/E Ratio

Novo Nordisk A/S (NYSE: NVO  )

*****

Health care

23.99

26.7

21.38

ChinaMedical Technologies (Nasdaq: CMED  )

*****

Health care

37.02

21.5

29.7

Almost Family, Inc. (Nasdaq: AFAM  )

*****

Health care

43.25

22

22

Mindray Medical International Ltd. (NYSE: MR  )

*****

Health care

41.93

22.4

48.4

Meridian Biosciences, Inc. (Nasdaq: VIVO  )

*****

Health care

27.05

23.8

35.5

Novartis AG (NYSE: NVS  )

*****

Health care

30.64

24.5

8.1

Kinetic Concepts, Inc. (NYSE: KCI  )

*****

Health care

24.99

33.1

10.8

While all of these companies have fantastic growth and a strong balance sheet, only Kinetic Concepts and Novartis are selling cheap; Novartis is priced at only a little more than eight times earnings, but it is very near its 52-week high.

Kinetic Concepts
Kinetic Concepts is a mid-size medical technology company that makes and sells products for wound care both in the U.S. and internationally. The stock is very near its 52-week low, primarily because of costs associated with this year’s purchase of LifeCell Corp, a tissue-repair company. The purchase has been a drag on profits in the near term.

The stock has a trailing price-to-earnings ratio of 10 and a forward P/E of 9. This is pretty cheap, considering that the company has been consistently growing earnings by nearly 25% per year. The stock has a great product in a growing industry.

Here’s what highly rated CAPS member DemonDoug said about Kinetic Concepts back in April:

Low P/E, beaten down recently, reaffirmed guidance, growing earnings, international presence is always a great thing in this falling dollar environment. Again fits my criteria of nearer the 52-week low with my value bias to stocks, but make no mistake, this is a growth company that should continue to grow.

The stock was a few points higher then.

All of the above stocks are attractive, but most of them have already had a decent run. These stocks are worth watching to research further, and possibly to buy on weakness. But I can’t see paying up for anything in this market.

What do you think about these stocks and the health-care story in general? Speak your mind on Motley Fool CAPS. More than 110,000 investors are waiting to hear what you have to say. CAPS is 100% free, so simply click here to get started.

Mindray Medical International Ltd. is a Motley Fool Rule Breakers recommendation.

Fool contributor Tom Hutchinson holds no financial position in any companies mentioned. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 04, 2008, at 7:47 PM, dc46and2 wrote:

    How would health care investors be affected if the US decides to socialize health care?

    The industry is going to grow immensely, but somebody has got to pay for it. The government knows it can't afford the health care it's promised the American people through Medicare and Medicaid. I suspect they will adopt a single-payer system to facilitate rationing and other cost controls.

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