Sniffing out winners in U.S. healthcare

John Reese is founder and CEO of Validea.com and Validea Capital Management, and portfolio manager for the Omega American & International Consensus funds.

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As the dust begins to settle after the U.S. adopted its landmark health-care legislation, investors are scrambling to determine which areas of the sector stand to benefit, and which could be harmed.

Such sweeping new health-care laws can spur nice gains or substantial losses for certain areas of the market in the short term.

Just look at the performance turned in last Monday in the U.S. markets, which saw hospitals - a perceived "winner" in the legislation - among the early leaders, and health-plan firms - considered a "loser" - among the worst performers.

While the new laws help some types of firms and hurt others, blindly rushing in or out of those areas of the market isn't wise.

Over the longer term, some companies will take advantage of the opportunities the new health-care regime offers them, while others (even companies within the same industries) will not.

A rising tide for a particular industry can only lift an individual boat so far; in the end, the company likely needs a strong business and good leadership to continue to succeed, and its shares likely must be selling at reasonable starting values for investors to benefit.

It's also important to keep in mind that many of the new provisions won't kick in for several years. And it goes without saying that reforms as extensive as these could have all sorts of unintended consequences.

With all of that in mind, I used my Guru Strategy computer models (each of which is based on the approach of a different investing great) to find companies that are in industries that stand to get a boost from the reforms, but which, more importantly, have proven that they can build their businesses over the long haul - and which have reasonably priced shares.

Here are a few stocks that fit the bill. Their fundamentals indicate that they'd be good plays, health-care bill or no health-care bill, though the legislation's passage could give them a nice added boost.

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Sanofi-Aventis SA

(SNY-N)

Headquartered in Paris, Sanofi makes an array of medications that are popular in the U.S., including Allegra (allergies), Ambien CR (a prescription sleeping aid), and Plavix (used to prevent blood clots) - and those drugs will be options for more than 30 million previously uninsured Americans who will now get coverage.

Sanofi, with a market capitalization of $98-billion (U.S.), passes three of my guru-based models, including the one I base on the writings of the late, great Benjamin Graham. This conservative approach likes Sanofi's strong balance sheet - its current earnings-per-share ratio is 2.18, and its $8-billion in long-term debt is less than half its $17.2-billion in net current assets.

It also likes the price - Sanofi's price-to-earnings ratio is 13.85, and its price-to-book ratio is 1.53, both of which are low enough to pass this model.

Sanofi also gets approval from my Peter Lynch- and James O'Shaughnessy-based models. The Lynch approach likes that the firm's yield-adjusted PEG ratio (which divides a stock's P/E ratio by the sum of its long-term growth rate and dividend yield) of 0.63. That's well below the model's 1.0 upper limit and indicates Sanofi is a bargain at its current price.

The model also likes Sanofi's very manageable 18.3 per cent debt-to-equity ratio. My O'Shaughnessy value model, meanwhile, likes the company's size, cash flow ($4.17 per share v. the market mean of $81 cents), and strong 4.4-per-cent dividend yield.

Medco Health Solutions (MHS-N)

Pharmacy benefits managers also stand to benefit from 30 million more insured Americans, many of whom previously couldn't afford medications. Medco has the U.S.'s largest mail-order pharmacy operations and, more importantly, the $30-billion market cap firm is a favourite of my Lynch- and O'Shaughnessy-based models. The Lynch approach likes its strong 28.8-per-cent long-term EPS growth rate, and its solid PEG of 0.87.

The O'Shaughnessy approach, meanwhile, sees Medco as a growth play, and as such likes that the firm has upped its earnings per share in each year of the past half-decade. It also likes the stock's 0.51 price-to-sales ratio and relative strength of 60, which indicate that the stock has some momentum but is still selling on the cheap.

Universal Health Services (UHS-N)

More insured Americans should also mean fewer unpaid bills and charity-type cases - and thus more revenue - for hospitals. UHS owns and operates 25 acute-care hospitals and 102 behavioural health centres in the United States, and it gets high marks from my Lynch- and O'Shaughnessy-based models.

The Lynch approach likes the $3.4-billion market cap firm's 22.4-per-cent EPS growth rate, 0.60 PEG, and reasonable 55-per-cent debt-to-equity ratio; the O'Shaughnessy growth model likes its rising EPS (up each year of the past half-decade), low price-to-sales ratio (0.66), and solid relative strength (70).

Disclosure: I'm long Sanofi, Medco, and Universal Health.