Stocks: The STARS of Health Care

This week's screen identifies 13 names in the sector that score S&P's highest investment ranking of 5 STARS

Since mid-March, Standard & Poor's Equity Strategy has advised an underweight allocation to the health-care sector. While health care has, in the past, acted defensively in down markets, it has not been performing that way this time.

"We continue to recommend underweighting areas with poor profit visibility such as health care, as we see sparse drug pipelines and continuing patent expirations weighing on the profit outlooks of the pharmaceutical companies, while deteriorating pricing power and growing margin pressure are squeezing profits in the managed-care and medical-device industries," says Alec Young, equity strategist for S&P.

Health care makes up 11.5% of the market cap of the S&P 500 index, but S&P Equity Strategy advises a weighting of only 10.5%. However, S&P analysts forecast 14.4% earnings growth for the sector in 2008, outpacing the expected 7.9% profit growth for the "500" as a whole. And most of that earnings growth is expected to come in the second half of the year.

Still, of the 155 stocks in S&P's health-care coverage universe, we found only 13 graced with a 5 STARS (strong buy) ranking, indicating the expectation of superior outperformance in the next 12 months. We present them in the table below:

Company Ticker
Alpharma ALO
Becton Dickinson BDX
Covance CVD
Genomic Health GHDX
Genzyme GENZ
Laboratory Corp. of America LH
McKesson MCK
Psychiatric Solutions PSYS
Teva Pharmaceutical TEVA
Thermo Fisher Scientific TMO
Varian Medical Systems VAR