The healthcare sector got a boost this week from the Supreme Court’s seemingly split view on the Affordable Care Act. The market translated the mixed opinions from the court as a signal that there are not likely to be sweeping changes to the law, which has been a bullish catalyst for healthcare stocks for more than a year.
For us, though, the real value is found by getting into the second and third layer of companies in the sector to find the real performance driving the group.
Despite the outperformance and popularity of this sector, there are still a number of companies that are poised to outperform the market, according to our Behavioral Valuation models. Simply put, our models search for companies that are outperforming the market that “the crowd” hasn’t found, yet.
Typically, these diamonds in the rough tend to outperform the market and their peers over the short-term as they are discovered for their strength, and attract a new crowd of buyers.
Healthcare Stocks to Buy: Becton, Dickinson and Co. (BDX)
Medical instrument devices company Becton, Dickinson and Co. (NYSE:BDX) produces various lines of medical delivery instruments, containers and diagnostic products. The product line may not be sexy, but definitely a growing necessity in the industry.
Shares of BDX are trading in a strong uptrend that is marked by new highs as they break through the $150 level. Pessimistic sentiment is heavy on the stock as shorts have increased their bets on the move higher. We believe that the break above $150 will get these shorts covering and help drive the stock towards the $170 mark.
Healthcare Stocks to Buy: Quest Diagnostics Inc. (DGX)
Quest Diagnostics Inc. (NYSE:DGX) has been on our healthcare radar for more than a year as an outperformer. Quest specializes in diagnostic and laboratory services for healthcare providers, clearly a growing business. The company’s earnings have provided a positive fundamental backdrop for growth that has been well represented by the stock’s performance.
Ove r the last three months, DGX has returned about 9% against the S&P 500’s 2.3% return and 35% against the S&P 500’s 12% return over the last 12 months. Despite the stunning performance the shares go unloved by the market.
The latest short interest report reveals that there are more than 10 times the current average daily volume tied-up in short interest (bets that the stock will decline. In addition, only 14% of the analysts covering the stock have it ranked a buy.
The “crowd” will warm-up to DGX shares at some point, which will drive shares higher as the bears give in and start buying it themselves. That’s the time to sell, until then this stock outperforms.
Healthcare Stocks to Buy: Impax Laboratories Inc (IPXL)
Sticking with the lesser-known approach, Impax Laboratories Inc (NASDAQ:IPXL) is a pharma company that provides generic pharmaceuticals to the market. The last year has shown a marked improvement in the fundamental results, earnings and revenue, which has translated to performance that is 12 times that of the S&P 500 (60% versus 5% for the market).
Despite the vast outperformance, the stock is underappreciated by The Street with only 29% buy recommendations and a short interest ratio of 17.1. This seriously negative sentiment suggests that the Crowd is on the wrong side of IPXL and will have to capitulate at some point, adding fuel to the bullish fire.
Some consolidation at the $40 has been going on as the market has also slowed, but we expect IPXL shares to move higher ahead of its earnings scheduled for the end of April.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.