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Health Care Stocks: Performance Plus Value

The next requirement for me is valuation. Relative performance and momentum are good things to have, but we have learned many hard lessons over the years about the importance of value. Just ask the investor from 2001. Just ask the single family home buyer from 2006. Valuation is critical.

Let's next take a look at the stock's current valuation numbers.

Data from Best Stocks Now App

The stock is currently trading at just over 18 times earnings. The consensus growth rate over the next five years is about 16% per year. The stock is currently trading at a slight premium to its growth rate. This shows up as a current PEG ratio of 1.15.

PEG ratio is just one valuation measure, however. During my years as an analyst I liked to establish five-year target prices. I did this by extrapolating out the earnings over a five-year period of time and then applying a multiple to that estimate to establish my target price.

When I use this formula for Team Health, I come up with a target price of $74 per share. I require at least 80% or more upside potential in order to meet my valuation criteria. Team Health currently meets this criteria.

We are almost there, we just need to satisfy the good stock chart criteria. I never buy sideways trends. I like to see a catalyst first. Stocks can remain in sideways trends for a long time.

I never buy downtrends. Buying downtrends is almost always a very costly game.

I am very nervous about buying stocks that have been going up for a long time and are extended -- especially if they are getting expensive. The worst trend of all is a tired, rolling-over trend like the chart of the bond market above.

I like charts that are breaking out of consolidations and, hopefully, beginning a new uptrend. Once again, meeting all these criteria is an extremely tall order. Let's have a look at Team Health's six-month chart:

I see a chart that is currently attempting a new breakout.

Obviously, there are no guarantees in the stock market. All we can do is tilt the probabilities in our favor as much as possible. For this reason I usually have 20 to 30 stocks equally weighted in the portfolios that I manage.

At the current time, Team Health meets all of the very strict criteria I have before I consider owning a stock. For this reason, aggressive growth clients of Gunderson Capital Management are currently long the stock.

Of the 3,406 stocks that I follow, the stock currently ranks at number 163 overall and earns a grade of A-This represents the top 5% of the entire market.

Data from Best Stocks Now App

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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