Healthcare stocks have continued their stunning trend in 2013, represented most broadly by the Health Care Select Sector SPDR (NYSE:XLV), which has jumped by more than 8% since Dec. 31. This sector has plenty going for it now as the positive fundamental story, drive by healthcare reform, combines with some seriously strong technicals to frame a bullish outlook for the group.
As if the sector needed it, though, there’s a kicker. Sentiment toward the healthcare companies remains somewhat negative, suggesting that the sector is far from being a “crowded trade.” This, of course, has us looking for opportunities to profit from a continuation of the healthcare trend.
Click to Enlarge For sector investors, the XLV exchange-traded fund is a great way to ride the friendly trend in healthcare. XLV shares offer exposure to companies like Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Abbott Laboratories (NYSE:ABT). As of Monday, 83% of the companies that make up the XLV were trading above their respective 50-day moving average, putting the healthcare ETF among the stronger-performing ETFs from a technical breadth perspective.
What’s surprising about the healthcare sector is the aforementioned lack of attention from analysts. For example, the most recent analyst recommendations shows that on average, only 54% of the recommendations in the sector fall into the “buy” category. That puts healthcare right in the middle of the pack on this basis, and shows that there’s plenty of room for upgrades.
While the XLV is a great position for the portfolio, a few individual companies deserve a mention as great candidates to ride the intermediate-term trend higher. Here are a few lesser-followed stocks that should be roaring higher in the next few months:
Becton-Dickinson
Click to Enlarge Medical technology company Becton-Dickinson (NYSE:BDX) develops, manufactures and sells medical devices and instruments.
Earnings have been on the mend lately as the bottom line is now beating analyst expectations, but the analyst community is only starting to produce upgrades. The current buy recommendations stand at 30%, signaling that there are plenty of potential upgrades to drive prices higher. Similarly, short interest data shows the potential for a short-covering rally as the current short interest ratio stands at 9.0.
Expect to see BDX break to $100 as new 12-month highs get the BDX bears into a buying mood.
Boston Scientific
Click to Enlarge Boston Scientific (NYSE:BSX) used to be one of the darlings of the sector … before it fell to single-digit territory. Now, with a new CEO — who hails from Johnson & Johnson — the company surprised with a top-line beat, a decent outlook and some restructuring.
The fundamental turnaround has the stock trending toward the $10 price level, despite analysts like Goldman Sachs (who reiterated its sell rating ahead of the latest earnings report) looking down on BSX.
For now, the fundamental developments, technical strength and pessimistic sentiment combine for an intermediate-term bullish rank on the stock with a target of $10.
Tenet Healthcare
Click to Enlarge Tenet Healthcare (NYSE:THC) operates acute care hospitals, ambulatory surgery centers, diagnostic imaging centers and related healthcare facilities in the United States. Earnings have been volatile, but on average positive.
Healthcare reform has the potential to benefit service providers like THC. We’ve seen some upgrades in January and December as the fundamentals improve the outlook of the analysts. The stock is among the list of companies with the strongest and lowest volatility trends, signaling that THC’s steady ascent is likely to continue.
For now, a target of $45 over the next two months appears reasonable.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
