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Now that President Obama’s intentions for health care are a bit clearer, some of the sector’s stocks are worth a look. We know that health maintenance organizations are the most likely targets – and probably for good reason, Cramer said Tuesday – but there are a number of other industries that could get a free pass.
Look at the device makers, such as Cramer favorites Boston Scientific [BSX
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] and St. Jude Medical [STJ
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], both of which ended the day higher. These stocks have been roaring, he said, and the drug stocks have started to move as well. Who’s next? Cramer thinks it could be the diagnostics, especially because they are a health-care money saver and Obama loves that.
Cramer assumes that the mutual fund managers are following these stocks as well, and he expects the big money to mark up a few names – or, create gains to impress investors – specifically, Quest Diagnostics [DGX
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]. Because fund managers regularly consult stock charts before they buy, and these are the guys who set share prices, Cramer did the same for DGX.
The problem? None of his favorite technical analysts can agree on Quest’s outlook. One said the stock works as a trade in the low $50s. Another endorsed it at those levels, but only as a play on an overall market rally. And still another dislikes DGX no matter what. Cramer said the mixed reviews canceled each other out, and that he’d have to rely on the fundamentals to make the call.
As far as the fundies are concerned, Quest is a buy. Because if Obama’s focus is Medicare, then this company has little about which to worry – lab testing represents just 1.7% of Medicare dollars. Also, 2009 is the first year in the last five that lab-testing rates have seen an increase. And even if the government chooses to roll that back, which Cramer said is unlikely, Medicare made up just 15% of Quest’s total revenues in 2008. The potential to hurt the company’s business is minimal.
Cramer called Quest a fast-growing business in a fast-growing industry. Despite being the largest lab-testing firm in the US, Quest controls only 12% of the market. So there’s plenty of room left to grow. The company also is moving into higher-margin and higher-growth areas like gene-based testing, as well as into Brazil and India. An added bonus – cost-cutting efforts should garner $500 million in annualized savings by the end of 2009.
Here’s another point to keep in mind: Obama’s proposed legislation could be a huge boon to Quest, because 70% of all health-care decisions are made using a laboratory test.
The stock, trading at just 13 times next year’s earnings with a 12.8% long-term growth rate, is cheap relative to the sector’s three-year and five-year average multiples of 16.2 and 16.5 times earnings, respectively. If Quest reaches that level, this $53 stock would fetch nearly $65, 22% higher than present levels.
Cramer’s bottom line? The worst of the Obama-health-care uncertainty is over, and that makes Quest a buy, especially if mutual funds pile in as he expects. That would push the stock higher.
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