BOSTON (TheStreet) -- The past week has been marked by a sell-off in stocks and heightened uncertainty. Unrest in the Middle East, elevated crude-oil prices and the disaster in Japan have dragged down global equities, and the looming conclusion of the Federal Reserve's bond-buying program is also a headwind. Health-care shares, which are likely to benefit from an aging baby-boomer population, an irrefutable demographic catalyst, are comparatively safe U.S. investments. The following three S&P 500 health-care stocks receive the highest ratings from analysts. They have grown sales and profit rapidly since 2008, yet remain undervalued compared to equities in other sectors and peer investments.


Medco Health Solutions


is a pharmacy benefit manager, providing services to private companies, public enterprises, health plans, labor unions and individuals on Medicare.

Medco has nine mail-order pharmacies and six call-center pharmacies. Medco uses its size and capital base to negotiate discounts with drug companies. It is a middle man with bargaining power due its sizable customer base. Once part of Merck, Medco was spun off in 2003 due to obvious conflicts of interest.

Medco now has a $24 billion market capitalization and more than $60 billion of annual sales. In a sector rife with inefficiency, Medco has a clear mandate: To save its customers money. Having remained loyal to this tenet, Medco has grown rapidly since the recession.

In 2010, Medco grew revenue 20%, net income 11% and earnings per share 21%. Since 2008, it has increases sales, net income and earnings per share 14%, 16% and 25% annually, on average. Medco's adjusted fourth-quarter adjusted earnings advanced 26% to 94 cents, narrowly exceeding analysts' consensus estimate. Sales, up 11% to nearly $17 billion, beat consensus by 1.8%. But, Medco's stock fell more than 5% in reaction to the report.

Medco's business is remarkably stable, but suffers from narrow profit spreads. Its quarterly gross margin inched up from 6.8% to 7.0% and its operating margin crept from 3.8% to 3.9%. Medco's cash balance fell 64% to $910 million as debt increased 25% to $5 billion.

The upside to debt financing is ample return on equity, the key measure of profitability for stock holders. Medco's return on equity has risen from 19% in the fourth quarter of 2008 to 20% in the fourth quarter of 2009 to 36% in the latest reporting period. Return on assets, a measure of overall business profitability, strengthened from 7.2% to 8.4%, year-over-year.

Despite these outstanding metrics, Medco's stock is cheap, trading at a forward earnings multiple of 12 and a sales multiple of 0.4, 20% and 48% peer discounts. Its PEG ratio, calculated by dividing the trailing P/E by analysts' terminal earnings growth forecast, of 0.7 reflects a 30% discount to estimated fair value. Of analysts covering Medco, 30, or 88%, advise buying its stock, three recommend holding and one suggests selling. A median analyst price target of $72 suggests a 21% advance over the next 12 months.

Bullish Scenario


BMO Capital Markets

rates Medco "outperform" with an $85 target.

Bearish Scenario


RBC Capital Markets

ranks Medco "outperform" with a $68 target.


Thermo Fisher Scientific

(TMO) - Get Thermo Fisher Scientific Inc. Report

designs and sells life-science tools, including high-tech and lab equipment, research software and analytics and chemicals, consumables and reagents. It holds sizable market share in a niche field.

The company was formed in 2006 through the stock-for-stock merger of Thermo Electron and Fisher Scientific. Sales, net income and earnings per share have increased 6.7%, 22% and 25%, respectively, in 12 months. It has grown them 3.4%, 11% and 13% annually, on average, since 2008.

Thermo ranks as analysts' second-favorite health-care stock, receiving "buy" recommendations from 15, or 88%, of those covering the stock and two "hold" ratings. No researchers advise selling. The stock has a median target of $68.23 implying 27% of upside.

Thermo's adjusted fourth-quarter earnings rose 15% to 95 cents, outgrowing the consensus expectation by 5.3%. Its sales, down 2.1%, narrowly missed consensus. Thermo's stock declined 2.4% in reaction to the report. It has dropped 2.6% in 2011.

The quarterly gross margin extended from 43% to 45% and the operating margin inched past 13%. Thermo's cash balance dropped 41% to $926 million and debt declined 2% to $2.1 billion, for a quick ratio of 1.4 and a debt-to-equity ratio of 0.1. Thermo's quarterly return on equity rose from 5.5% to 6.7%, boosted by a smaller float, and its return on assets widened from 3.9% to 4.9%. Its stock sells for a forward earnings multiple of 12, a book value multiple of 1.4 and a cash flow multiple of 14, 39%, 63% and 23% discounts to life sciences tool and services industry averages. Its PEG ratio of 0.4 signals a 60% discount to fair value.

Thermo's stock has delivered annualized gains of just 0.9% since 2008.

Bullish Scenario


Credit Agricole

rates Thermo's stock "buy" and expects it to hit $81.

TheStreet Recommends

Bearish Scenario


Goldman Sachs

ranks Thermo's stock "neutral" with a $60 target.




, spun off from



in 2007, makes health-care products for clinical and homecare settings as well as pharmaceuticals.

Covidien's net income and earnings per share have risen 76% and 73%, respectively, over the past 12 months, though sales declined 1.9%. Since 2008, revenue, net income and earnings per share have climbed 15%, 65% and 78% annually, on average.

Covidien's stock ranks as analysts' favorite S&P 500 health-care investment, with 20, or 91%, of the analysts in coverage recommending that clients purchase shares and two advise that they hold them. No researchers rank Covidien "sell." The stock has a median 12-month target of $57.11, suggesting a gain of 11%. Covidien is the second highest-rated S&P 500 stock, even ahead of


(AAPL) - Get Apple Inc. (AAPL) Report


The company's adjusted fiscal first-quarter earnings expanded 16% to 95 cents, beating analysts' consensus target by 18%. Sales, which grew a more-modest 4.7%, exceeded consensus by 1.4%. Covidien's stock rallied 3.5% in reaction to the report. Shares have appreciated 12% in 2011, outperforming comparable health-care equities.

The quarterly gross margin extended from 60% to 62%, but the operating margin remained steady at 22%. Covidien held $1.2 billion of cash and $4.4 billion of debt at quarter's end, for a quick ratio of 1.3 and a debt-to-equity ratio of 0.5. Covidien's stock trades at a trailing earnings multiple of 16, a forward earnings multiple of 13, a book value multiple of 2.8, a sales multiple of 2.4 and a cash flow multiple of 13, discounts of 28%, 34%, 32%, 36% and 26% to sector averages. Its PEG ratio of 0.8 reflects a 20% discount.

Bullish Scenario


BMO Capital Markets

forecasts that Covidien will rise to $60.

Bearish Scenario


Lazard Capital Markets

predicts that Covidien will climb to $52.

-- Written by Jake Lynch in Boston.


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