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Would Peter Lynch Like This Small Cap?

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From 1977 until he retired in 1990, Peter Lynch guided Fidelity's Magellan Fund to an astounding average annual return of 29%. With results like that, when Lynch talks, it behooves us Fools to listen. In his best-seller, One Up on Wall Street, Lynch offers 13 characteristics of the "perfect" stock. He devised these criteria from some of his most successful picks over those years at the helm of Magellan.

Today, we will examine a small cap based out of Miami: Continucare (AMEX: CNU  ) . Continucare, founded in 1996, has two main lines of business. First, it offers outpatient medical care through 20 locations in South Florida, tailoring its medical services to the swelling population of retired baby boomers. It also diagnoses sleep disorders at centers in seven states.

1. It sounds dull.
Continue and Care; the company just saved some ink by eliminating the E and the space between the two words. It's still boring. Point

2. It does something dull.
Continucare basically gives checkups to old people. When my parents start having to go to a place like this, I don't see myself chomping at the bit to go with them. Point

3. It does something disagreeable or gross.
This might be a matter of opinion, but I stayed away from a medical career for one big reason: needles! They give me the shivers. Point

4. It's a spinoff.
Sorry, Continucare started when it was founded in 1996. No Point

5. The institutions don't own it, and analysts don't follow it.
Currently, only 29.1% of shares are held by institutions and two analysts follow it. Point

6. The rumors abound.
Lynch wanted to point out that some industries, like garbage collection, might have shady connections with the mob. The same cannot be said of Continucare or the medical industry in general. No Point

7. There's something depressing about it.
Although Continucare certainly celebrates healthy living in later life -- they even have a Century Club for members over 100! -- I can't get beyond the fact that most Continucare participants are working with a shorter life span than the average outpatient. Point

8. It's a low/no-growth industry.
Everyone knows that the baby boom generation is approaching retirement age, and the impact on senior-oriented health care will be huge. According to Census estimates, the number of people age 65 and older could rise by nearly half between now and 2030. No Point

9. It's got a niche.
Continucare has set itself apart from other companies serving seniors, including nursing care provider Ensign Group (Nasdaq: ENSG  ) and Medicare specialist Metropolitan Health Networks (AMEX: MDF  ) , by offering affordable outpatient-only care. The company has a niche now, but as the field gets more crowded, it'll need to continue to differentiate its offerings. Point

10. People have to keep buying it.
People will always want access to medical treatment. Point

11. It's a user of technology.
Not only do most health-care-related companies use the latest technology, but Continucare just completed a modernization overhaul at two of its locations. Point

12. The insiders are buying.
In the last six months, there have been no insider purchases. No point

13. It's buying back its shares.
Continucare has been buying back shares since 2005, spending a bit more than $26 million to do so. Point

Congratulations go to Continucare, receiving nine out of 13 points. This does not, however, make Continucare an immediate "buy." Lynch didn't earn his results simply by passing all companies through a screen like this. It provided him with a starting point for his due diligence. By taking this information and starting your own research on Continucare, you'll be following in the footsteps of an investing legend.

More on Peter Lynch:

Fool contributor Brian Stoffel hopes his parents aren't offended by No. 2 above. He does not own shares in any of the companies in this story. Try any of our Foolish newsletter services free for 30 days. 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.

Read/Post Comments (3) | Recommend This Article (9)

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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.

  • Report this Comment On October 28, 2010, at 11:21 AM, weswood wrote:

    I think they actually get a point on #6. Continucare gets the majority of it's revenue from Medicare, and several healthcare providers in South Florida have been closed down for Medicare fraud in the past 6 months.

  • Report this Comment On October 28, 2010, at 5:56 PM, Mstinterestinman wrote:

    Another Company I think Lynch would like is Ebix. Passionate CEO great numbers and hardly anyone knows about it.

  • Report this Comment On October 30, 2010, at 4:04 PM, brewersfan81 wrote:


    Excellent point that I overlooked. That brings CNU up to ten points! Not bad at all.

    Brian Stoffel

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