THE BLOG
11/08/2009 05:12 am ET | Updated May 25, 2011

Three Musketeers of Health Care

If a bully keeps punching you in the face, you have several choices: fight back, just keep getting battered and hope the bully will stop, or run away.

Similar kinds of questions can also apply to the stock market, which likewise has been pounded by an economic bully through a nasty recession that pushed the number of jobless Americans to 14.9 million, butchered equity prices and decimated trillions of dollars in household wealth.

In brief, the nation's more than 80 million stock investors face several choices: junk the stock market, hold fast with what appears to be a peppier market and pray, or try to make a buck by picking a stock using your thinking cap, not a dunce cap.

That, in effect, is what former Goldman Sachs investment strategist Fred Dickson stressed to me the other day. "We're still in an economic hole," he says "and while it's not getting any deeper, it's still pretty deep." Taking note of the market's giant run, Dickson sees the prospects of a series of bumps over the next few months, essentially modest short-lived near-term declines of 4% to 7%. Still, he thinks certain stocks make a great deal of sense, in the process stressing the need for selectivity and those names that can offer some peace of mind.

One of his top picks is in the hospital supply arena, Stericycle, which specializes in medical waste and is a beneficiary of the belief of hospitals that they can save money by outsourcing waste disposal.

Interestingly, some research recently crossed my desk, one from the Complete Investor, a New York newsletter that pitched what it described as "recession-resistant" hospital supply companies. Its focus was on companies that supply the basics, not the big-ticket or esoteric items. The letter, a product of veteran investment adviser Stephen Leeb, featured three names, one of which just happened to be Stericycle. The other two were Baxter International and Becton, Dickinson.

It reminded me of Alexandre Dumas' tale of The Three Musketeers--in other words, the Aramis, Athos, and Porthos of health care.

A contact at Baltimore-based money management biggie T. Rowe Price described the trio of stocks as "solid selections," telling me "I think you're looking at 15% to 20% gains in each one over the next 12 months."

Maybe so, but as the newsletter notes, selectivity is essential since hospitals have not been immune to the recession. Some 85% of the nation's hospitals are non-profit or government-owned, and funding has suffered as tax revenues have declined. Further, hospitals are finding it hard to issue bonds, while charitable donations have dried up. Moreover, these financial struggles have infected suppliers to hospitals as capital spending by hospitals has been slashed.

Also indicative of the need to be selective in picking the right hospital suppliers, the American Hospital association reports that 45% of hospitals surveyed in January have placed planned capital projects on hold, while an additional 13% stopped improvements already in progress.

Victims of such hospital capital budget cutbacks are General Electric, Philips electronics. Siemens and Varian Medical Systems.

The key, as the Complete Investor explains it, is to focus on companies that pick up sales from hospitals' operating budgets, as opposed to their capital budgets. Such companies, which its trio of favorites do, cater to basic patient needs, and demand depends largely on hospital admissions, making the stocks more recession-resistant.

Here's some of the letter's brief comment on each, kicking off with Stericycle, which is the lowest cost provider of medical waste management solutions. The company, which has shown itself able to grow in recessionary times as well as in stronger economies, derived nearly 25% of its sales in its most recent quarter from outside the U.S., where growth opportunities appear promising. Given its dominant position in a growing industry in the U.S. and its increasing presence abroad, the letter views Stericycle as a solid market performer over the next few years.

Baxter International, a medical technology company that specializes in dialysis products, vaccines and medical delivery systems, is relatively recession-resistant and well insulated from hospital cutbacks with a product lineup that addresses blood diseases (45% of overall revenues), cancer, hemophilia and kidney disease. About 60% of revenues come from outside the U.S., including 35% from Europe. International exposure, though, has been a negative lately because of unfavorable currency conversions, but, it's thought, should prove a positive over the longer term as the dollar likely slips in value.

Becton, Dickinson is a leading supplier of needles, syringes and other disposable medical devices, and also operates smaller diagnostics and biosciences divisions that focus on specimen and diagnosis and on products used in research and development. Around 54% of company sales are generated from abroad. While diabetes products, surgical tools and safety-engineered items provide the company with stable income. its biosciences and diagnostic divisions tap growing markets for medical research and drug development and are seen as key drivers of growth in coming years.

So there you have it--a gung-ho view of what's thought to be one of the healthiest areas of health care and its three musketeers.

Write Dan Dorfman at Dandordan@aol.com