NEW YORK (TheStreet) -- Shares of Johnson & Johnson (JNJ) - Get Report have underperformed the S&P 500 over the past year. The company's fortunes, along with the health-care sector, are due for a turnaround, says Gregory Estes, manager of the Intrepid All Cap Fund (ICMCX) - Get Report.
Estes also is bullish on small medical-device makers
The mutual fund, which garners a full five stars from
, has returned 13% over the past year, putting it in Morningstar's 92nd percentile. During the past three years, the fund has returned an average of 8% annually, better than 80% of its rivals.
Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.
After a lackluster 2010, why are health-care stocks are a smart place to be in 2011?
They are cheap now because most people are looking for more cyclical names. We are looking for stable businesses where there is a dislocation between price and value, and we are finding a lot of them in the health-care field.
Johnson & Johnson has had some quality problems lately. What makes you think they can get on the right track?
We take the long view on that. We think there is some liability with their product recalls. But they are still going to generate $14 billion to $15 billion in cash. There is an attractive free cash flow on that business, and we think the stock will do just fine over the long run.
Why do you think CR Bard will outperform over the next year or two?
CR Bard is in a good position. They are an innovator. They develop small medical devices, and that industry is growing. It's a high-quality business with a good balance sheet, high free cash flow. And there is a dislocation between price and value because of the lack of cyclicality in that business.
Why is it more favorable to own the manufacturers of small-medical devices like CR Bard and Teleflex as opposed to makers of larger hospital equipment?
There is an excise tax that is being put on medical devices through health-care reform. That is more impactful on larger capital equipment like MRI machines for hospitals. It's less impactful on stents where the small price increase will likely get paid. So we prefer to own businesses that rely less on the capital budgets of a hospital.
It has a great moat around its business. It has several HIV drugs. It has a new HIV drug in development and another one that will launch in the second half of this year. There is also a price dislocation there. They have virtually no debt on the books and the free cash flow yield is about 10%, which we think is great.
-- Reported by Gregg Greenberg in New York.
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