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Health Care Stocks to Watch in 2010

Stocks in this article: MRK PFE WLP CI CERN BSX

The medical technology health care sub-sector doesn't face the direct threats of managed care in the health care reform package.

What's more, medical technology stocks like Medtronic (MDT), Boston Scientific (BSX) and St. Jude Medical (STJ) can expect to receive a boost from favorable currency winds and continued weakness in the U.S. Dollar.

On a company-to-company basis, though, Medtronic has outperformed its peers in recent months, and Boston Scientific is the sector turnaround story on which all eyes are focused.

Boston Scientific is still implementing plans from its new management team, and that has the potential to generate earnings power in the short-term that will outdistance Medtronic, which has already rallied on recent outperformance. "We will see the benefits in Boston Scientific results over the next several quarters," says Leerink Swann's Sullivan.

Some analysts concede that Boston Scientific is poised for a turnaround -- new CEO Ray Elliott has been on the job for only six months and has overseen previous health care comebacks like Zimmer Holdings (ZMH). Still, they question the timing and extent of a positive move from Boston Scientific.

"Even if all Boston Scientific does is engineer a minor turnaround, the market will look at it very positively," said Miller Tabak's Funtleyder. "Because it was so weak in the past, it is quite possible that by default, with a new management team, Boston Scientific will show improvement," the Miller Tabak analyst argues.

Monness Crespi's Roy agrees, saying that from a stock performance standpoint, Boston Scientific is appealing, but it does come down to a belief that a turnaround is imminent, and with that belief Roy has his reservations.

Boston Scientific's price-to-earnings ratio is already slightly above the average in its peer group. Still, BSX bulls like Leerink Swann are projecting an increase from 14.6 times earnings times 2010 estimated earnings per share of $0.60, to 16 times a 2011 estimated earnings per share of $0.76. Leerink is projecting a Boston Scientific 12-month stock rise to $12, up from its current $9 level. Boston Scientific's 52-week high was attained at the end of the summer, before its disappointing third-quarter earnings.

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