"Under-the-Radar Stocks" is a daily feature that uncovers little-known companies worthy of investors' consideration. Check in at 5 every morning to find out about stocks that tend to beat their bigger brethren.As the rally fizzles, defensive stocks are returning to the spotlight, especially health care. Here's a small-cap medical supply distributor poised to gain. Owens & Minor ( OMI) has carved a niche by distributing other companies' medical products, everything from scrubs to scalpels. The company serves major players like Cardinal Health ( CAH) and Covidien ( COV), and sells its own discount line of common medical products under the brand MediChoice. In August, the company acquired Burrows Co., a Chicago-based medical supplier, for $30.2 million to expand its reach. Aging baby boomers will boost demand for health care supplies for years to come, increasing revenue for medical suppliers and manufacturers. In the past month, the Dow Jones U.S. Health Care Index, which includes Abbott Laboratories ( ABT), Amgen ( AMGN) and Johnson & Johnson ( JNJ), climbed 2% as the Dow Jones Industrial Average lost 6.1%. First-quarter revenue at the Richmond, Va.-based company rose 13% to $1.9 billion. Net income dropped 42% to $14 million because of the cost of divesting a direct-to-consumer diabetes-supply business. Earnings per share from continuing operations fell 8.5% to 54 cents. The company's operating margin has shed 46 basis points to a slim 2% since the year-earlier quarter as the net margin shrank by half to 0.7%. Owens & Minor's strong balance sheet compensates for its weak profitability. The company has quadrupled its cash position to $11 million since last year's first quarter. A debt-to-equity ratio of 0.31 reflects its conservative approach. We rate the company "buy" with a financial strength score of 7.9 out of 10, better than the 7 average of our "buy"-rated stocks.
Shares of Owens & Minor have gained 15% this year, outperforming all major U.S. indexes. The stock trades at a price-to-earnings ratio of about 18, a 21% premium over the average health care distributor. At its current price, Owens & Minor offers a 2.1% dividend yield, which is notably lower than the S&P 500 average. But the company has a strong track record of payout increases, and health care appears to be one of the only U.S. industries with consistent growth prospects. TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.