Prognosis Bullish for Health Stocks but Pick Them as Carefully as You Pick a Doctor

Article excerpt

Leaf through a passel of investment research reports on health-care companies and a singular message resounds: buy, buy, BUY.

Zoll Medical Corp., Cerner Corp., Haemonetics Corp., Kinetic Concepts Inc.: the list of unfamiliar names goes on and on.

Many are smaller concerns focused on narrow niches of a fast-changing marketplace. But expectations are running high for these and other health-care companies, with predictions of double-digit growth rates.

Some companies could see earnings increase as much as 35 percent as health-care reform unbridles opportunities for those that provide quality - and save money.

But beware. Not everyone will emerge a financial winner.

"Investors have got to be extraordinarily selective in their stock choices," said Jonathan Osgood, a securities analyst with Alex. Brown & Sons Inc. in Boston. "It's a minefield out there."

Thirty-nine health-care and biotech companies went public in the first three quarters of the year, raising about $1.13 billion, says researcher Securities Data Co.

Last year, a record 109 health-care and biotech companies launched initial public offerings that brought in $4.6 billion.

As fee-for-service medicine fades into the background, managed care, with its emphasis on cost containment, is transforming health care. Doctors are banding together to form large group practices. Hospitals are providing more outpatient care because fewer medical procedures require overnight stays.

Companies that provide off-site care, in-home care, prescription drugs by mail, computer software that eliminates workers and paper, drugs and devices that avert surgery, will flourish in the new environment. But they must demonstrate that their product or service lowers costs and improves patient outcomes.

"Companies are going to go wrong if they ignore the fact that they . . . have to have hard data showing cost effectiveness," Osgood said.

David Saks, an analyst with Gruntal & Co., said investors should only put money into companies that "clearly can document products that have a real benefit of enhancing quality of life and . . . save real money."

Investors should be skeptical of companies that proclaim "We save money in the health-care system" without proof.

Health maintenance organizations, founded on the notion of cost-conscious care, have been in the vanguard by requiring primary care physicians to serve as "gatekeepers," sanctioning referrals to pricey specialists and monitoring overall patient care.

"HMOs have been creating most of the changes," Osgood said. For that reason, HMO companies like United Healthcare, US Healthcare and Value Health are well positioned, he said, at least over the next few years.

Saks predicted it will take "a couple of years of shakeout before we see which companies are going in the right direction."

That means many promising forecasts will have to be redrawn. Some already have been scaled back.

For example, Bernard McDonagh, a managing director at Piper Jaffray Inc., a Minneapolis-based investment firm, lowered his growth projection for HealthCare Compare-Affordable. The company provides managed-care services to discounted networks of doctors to large companies, from 30 percent to 20 percent. …