As I’m sure you all know by now, one of my favorite parts of editing the Dick Davis Digests is looking for trends running through the hundreds of newsletters I read. Many of the trends are fairly obvious. Last week’s Investment of the Week focused on one of those—the relatively low price of natural gas. But my favorite trends are the small ones that go largely unnoticed.
Last week, for example, I was putting together Investment Digest when I noticed that we were featuring a startling number of stocks from the healthcare sector. But, unlike most periods when certain sectors are in vogue, I hadn’t read a broad endorsement of health and medical stocks all week. There was no news directing attention toward the healthcare sector—in fact, the major healthcare news last week was that the Supreme Court would consider challenges to the Affordable Care Act, creating more uncertainty for the sector, if anything.
Yet, there were a total of eight stocks from the healthcare sector in last week’s Investment Digest, making it the single best-represented sector in that issue. That’s more stocks than we had from the technology, energy, basic materials or consumer staples sectors.
Furthermore, half the eight companies had something else in common:
Two—Humana (HUM) and WellPoint (WLP)—are health insurance companies.
One—Express Scripts (ESRX)—is the leading pharmacy benefit manager.
The last, HealthStream (HSTM), provides training to healthcare workers.
These four companies aren’t providing healthcare so much as providing services to the healthcare sector. They’re one step removed from doctors and hospitals and medicine; the tools of their trade are paperwork and pencils, not scalpels and stethoscopes.
It might be this one step of removal that’s making these companies popular right now. Most stocks with the slightest hint of risk have been faltering recently, and a lot of investors have shunned risky momentum stocks for conservative, recession-resistant slower-growth companies. And theses service providers are some of the most stable companies in the already-quite-stable healthcare sector. Nevertheless, they have very nice growth prospects.
So if you’re looking for a good conservative growth stock, an investment in one of the four stocks mentioned above may serve you well. Here are the recommendations of my two favorites (the two with the strongest stock charts right now), HealthStream and Humana.
Andy Obermueller, editor of StreetAuthority’s Game-Changing Stocks, wrote the Healthstream recommendation on November 2:
“HealthStream is a virtual healthcare education company. ... Nearly every hospital employee, from the janitor to the CEO, has to be in compliance with various regulations that mandate a certain minimum, certified level of training. These include following privacy protection, which nearly every hospital employee must abide by, or knowing the proper way to handle a chemical, pharmacological or body-fluid spill. ... This company, which Forbes ranks 53rd on its ‘Best Small Companies’ list, expects to grow revenue 22% to 24% in 2011, from 2010 levels. ... Operating income should increase even more, on the order of 55%. The reason is that healthcare companies, which already tend to operate at razor-thin margins, are doing their best to manage costs, and HealthStream helps them do that by reducing the need to send employees off-site for training. The lousy business climate has been good for HealthStream: Not only is it growing, but it’s increasingly signing long-term contracts with its clients, ensuring future revenues (and building in annual price increases). ... I recommend adding shares.”
Richard Segarra wrote up Humana on October 28 in the Ford Equity Research Report, which recommends stocks based on three factors: earnings growth, relative valuation and recent price movement.
“Humana is a health benefit company engaged in providing a range of health and supplemental benefit products for employer groups, government benefit programs, and individuals. ... While Humana’s earnings have declined to an estimated $6.70 from $6.79 over the past five quarters, they have shown acceleration in quarterly growth rates when adjusted for the volatility of earnings. This indicates an improvement in future earnings growth may occur. ... Relative valuation is positive. Humana’s operating earnings yield of 8.3% ranks above 79% of the other companies in the Ford universe of stocks, indicating that it is undervalued. [Finally,] price movement is very positive. Humana’s stock price is up 38.9% in the last 12 months, up 7.1% in the past quarter and up 5.3% in the past month. This historical performance should lead to above-average price performance in the next one to three months.”
Investing in tiny pharmaceutical companies whose success hinges on FDA approval of new drugs can be fun ... but it also involves significant risk. In this environment, a blue-chip insurer like Humana or a recession-resistant service provider like HealthStream is a safer bet.
For more details on Humana (HUM) and HealthStream (HSTM), as well as other top stocks featured in Dick Davis Investment Digest, click here.
Wishing you success in your investing and beyond,
Chloe Lutts
