Health Care Stocks That May Thrive

Here's an easy way to induce nausea on Wall Street: Say the words "health care." You name it, these stocks--drug companies, biotech startups, and health-care-service companies alike--have been hurt by fear of the Clinton Administration's impending health-care program. But contrarians are betting that there are gems among the wreckage.

Stock pickers are avoiding health-care-service companies, such as nursing home operator Beverly Enterprises, in the view that these stocks will remain troubled as the Clinton plan takes shape. But they are taking a sharp look at companies likely to cash in from cost-containment. "Any company that can save money or get someone out of the hospital a day earlier is going to thrive in this new environment," observes Evan Sturza, editor of Sturza's Medical Investment Letter in New York.

Mail-order pharmaceuticals are one especially promising sector of the health biz. Hospitals and employee-benefit plans are cutting costs by buying directly from drug suppliers. Of mail-order companies cashing in on this trend, the best-known is Medco Containment Services. But less famous companies may offer better values. Sturza likes SysteMed in Laguna Hills, Calif., which caters to small and midsize businesses. SysteMed's profits have been under pressure because of a one-time loss from the closing of a facility in Ireland, but otherwise its prospects look fine.

Jim Steiner, a health-stock analyst at Dain Bosworth, is bullish on Chronimed, a Minneapolis mail-order drug distributor that's getting a growing clientele among "third-party payers," insurers and health-maintenance organizations. Says Steiner: "You're going to see third-party payers providing patients in bulk to Chronimed."

GOOD BUY. Companies specializing in home health care and ambulatory surgery--outpatient centers that are cheaper than hospitals--are also likely to do well. Steiner likes Medical Care America and Vivra, which operate surgery centers. The stocks have languished in recent months, and Steiner believes they are a good buy at price-earnings ratios of 18 and 17, respectively.

Generic drug companies are worth a second look, as are makers of medical devices that reduce hospital stays. Sturza's picks: Datascope, which makes a product aimed at plugging vascular punctures, and Heart Technology, whose Rotablator clears clogged arteries--and cuts the number of coronary bypass operations.

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