Healthcare
Wednesday, October 22nd, 2008

The sector has been under pressure like everything over the last six weeks. The index broke support at the 305 mark and hit a low at 248 on October 10th. The bounce has been solid gaining more than 12% and holding. I would expect a base to build in this trading range with resistance coming at 305. The key for the sector will be to dissect the parts and find the winners. For example a quick look at the drug or pharmaceutical sector shows a similar pattern to the overall healthcare sector. Yet the generic drug producers look stronger than the large drug stocks.

HMOs remain weak, they were already correcting moving into the last leg of this correction. Medical devices have bounced off their lows, but are suspect based on earnings short term. Credit will impact this sector as companies like GE have pulled back on available credit lines for new purchases. The biotech sector was correcting in August and that accelerated in October as the broad market sold off. It has bounced back to a resistance point and is one of the sectors to watch near term. Overall the healthcare sector has promise. The key is to dig and find the value within the subsectors or individual stocks. Timeframe is another consideration you will have to consider. The opportunities are more on the intermediate to long term timeframes, thus requiring some patience.



Breaking down the sector as I stated above led me to Johnson & Johnson as one of the fundamental standouts. Looking at the chart didn’t leave me with any great patterns or obvious buy signals technically. However, looking at the company fundamentally I did find cause to like the long term outlook. The share value is down only 4% year to date, compared with a 23% decline in the S&P Healthcare Index. The current P/E ratio is 14 times forward earnings, the lowest in over 10 years. Earnings growth estimates are running between 8-9% over the next 12 months. The current dividend yield is roughly 3%. The stock price has declined, but it is more of guilt by association and form my view is a value play looking forward. I have a price target of $72 over the next 12 months making this and intermediate term play.