With summer looming, health care investors are shopping for stocks that could heat up along with the weather.
Financial experts, including analysts at Goldman Sachs, recently suggested some potential sizzlers. In the firm's latest report, entitled "Fresh Ideas for Value Investors," Goldman Sachs singled out two health care stocks --
-- as likely outperformers and mentioned three other health care names as market favorites as well.
Other strategists weighed in with suggestions in the biotechnology, managed care and health care facilities sectors.
Goldman Sachs analyst Lawrence Keusch recommends Boston Scientific as his favorite value pick in the medical device space. He offers several reasons why he believes the stock is cheap and could be poised to rise by 50% or more. He rates the stock outperform.
For starters, he says, investors seem overly pessimistic about the company's role in the market for drug-eluting stents. He concedes that the company's Taxus stent will see its market share -- currently at 59% -- drop but at a less precipitous rate than many believe.
Second, he insists that investors have given virtually no credit to the company for its pipeline despite management's "solid track record of execution." Finally, he believes that investors have failed to appreciate the company's ability to reinvest its robust cash flow in acquisitions and research projects that would further enhance shareholder value in the future.
Given such factors, Keusch estimates the fair value of Boston Scientific's stock at $42. The shares were up 1.5% to $27.72 Thursday.
In the pharmaceutical sector, fellow Goldman Sachs analyst James Kelly says he likes Pfizer best because of the company's "compelling" valuation, its "industry-leading" pipeline and its "credible" plan for managing costs during a time of significant patent expirations.
Kelly calls Pfizer, which he rates outperform, the least expensive stock in the large-cap pharmaceutical group. He points out that the stock, unchanged at $28.17 on Thursday, trades at a 20% discount to the sector despite its comparable long-term earnings expectations.
In the meantime, he says, several big Pfizer products continue to perform well. He notes that prescriptions for both Lipitor and Zithromax have enjoyed double-digit percentage growth so far this year. At the same time, he says, prescriptions for Celebrex have fallen off less than he expected. Moreover, he says, the company could launch three new drugs -- and file applications for three more -- this year alone.
He points to a patent challenge involving Lipitor as the biggest threat to the company. Meanwhile, however, another investment specialist has downplayed a newer risk.
Bob Howard, publisher of the newsletter
, this week dismissed concerns over Viagra's possible link to blindness.
"PFE is a stone-cold bargain here," he insisted this week. "Should I say you can buy it blindly here?"
In contrast, Massachusetts investment strategist Peter Cohan views Big Pharma in general as "bloated" and unattractive.
He says that even a diversified giant like
Johnson & Johnson
, which focuses on both drugs and medical devices, faces stiff competition from smaller players. Ultimately, he likes the biotechnology stocks far better. He notes that they have handily outperformed other health care stocks over the past 10 years. And he highlights
, which last week announced a breakthrough in vision recovery, as a current favorite.
Meanwhile, Credit Suisse First Boston analyst Catherine Arnold is steering investors away from at least one Big Pharma name. She believes that
will underperform the market because of an expected drop in earnings and increased concerns about its Vioxx exposure. Thus, she recommends that investors sell the stock and buy
Patrick Hojlo, another analyst at CSFB, likes managed care company
, which he rates outperform. He notes that the company continues to pursue strategic acquisitions, which could build future value, even after its big merger with Anthem. His price target for the stock, adjusted for this week's stock split, is $72.50. The stock was up 42 cents to $67.03 on Thursday.
Goldman Sachs analyst Matthew Borsch favors
, instead, as "the most defensive name in the group." He rates the stock in line and believes that WellChoice faces little exposure to overcapitalized nonprofit Blue Cross insurers that could threaten industry pricing. He also points to the company as a possible takeover candidate for WellPoint in the future. Both WellChoice and WellPoint are Blue Cross players.
Goldman Sachs points to both
as good values as well.
Analyst May-Kin Ho believes that MedImmune, which she rates in line, will report progress on three vaccines -- for the flu, human papilloma virus and respiratory infections -- over the next year. The analyst is looking for better margins on a current drug, Synagis, as well.
Meanwhile, fellow analyst Christopher McFadden offers several reasons to buy MDS, which also earns an in-line rating. Specifically, he points to the company's ongoing restructuring progress, its potential for long-term synergies, its possible role as a consolidator and a share price that already reflects specific challenges.
"We believe the valuation reflects recent segment-specific challenges, specifically in bioanalytical, and does not consider any potential synergy opportunities among the company's various business lines," McFadden explained. "The long-term strategy of MDS to create such synergies could provide upside over time."
MDS slipped a penny Thursday to $14.23.
In the meantime, one analyst continues to recommend a company whose former CEO continues to get a lot more attention than its stock. Balaji Gandhi of Pacific Growth Equities likes
, which usually makes headlines because its ousted CEO, Richard Scrushy, is currently on trial. Pacific Growth rates the stock overweight.
Earlier this spring, Gandhi noted that the company outperformed his expectations in 2004 and expects to grow its pretax earnings in 2005. Looking ahead, Gandhi believes the stock could hit the $8 range as early as this year.
The stock -- which once fetched less than a dime a share -- rose 5 cents to $5.40 on Thursday.