Buy the Best at the Right Price
By Rob Fannon, editor, The Medical Investor
May 25, 2007

Every investor has his price.

In other words, every stock is attractive at some price. The problem is that it's hard to find a great business trading at a great price. Take one of the world's best cancer drugmakers, Celgene Corporation (CELG), for example. You could buy Celgene. But at $60-plus a share, you'd have to pay more than 200 times earnings. 

Or you could go the other way and speculate on StemCells Inc. (STEM) for a "bargain" $2.50 a share. But you'd be taking a bad chance on an iffy technology in an unproven industry.

So how can we buy a safe, profitable business without paying through the nose? As health care investors, we have thousands of publicly traded companies to choose from, in a business that accounts for nearly 20% of the country's GDP.

I narrow the field by looking in the most promising sectors. There's literally dozens to choose from, with generics manufacturers, medical device shops, contract research organizations, pharmacy benefit managers, and drug wholesalers as my current favorites.

Two months ago, I took a look at medical supply distributors... It's a pretty boring business, simply shuffling products from manufacturer to consumer. In this case, however, the wares are pharmaceuticals, surgical supplies, and other health care products. Although boring, medical supply is the lifeblood of the country's $2 trillion health care business. Without it, the system would crumble.

After choosing the right sectors, our work isn't even half done. The next step is finding the most attractive investment within that sector. One choice might be a basket of companies. Now, investors can choose from several health care ETFs, including the Dow Jones U.S. Medical Devices Index fund (IHI) and the Dow Jones U.S. Pharmaceuticals Index fund (IHE).

But to grab truly outsized investment returns, you should pick the best company at the best price.

Within the medical supply sector, I focused on the top three players. Each company had sound management, strong future prospects, and an overall good business. All were worthy investments – at the right price.

So I looked for the business that was "on sale," comparing each company's intrinsic value to its market price, taking into account things like market share and other standard financial metrics. Here's what I found...

Premium/Discount to Intrinsic Value Company 1 24% Company 2 22% Company 3 -3%

After that, my choice was easy. I recommended Company 3 to my Medical Investor subscribers on April 11.

Since then, each of the three companies has reported quarterly results and provided guidance for 2007 and 2008. While the future looks bright for all of these companies, investors in Company 1 have lost 8%. Investors in Company 2 are down 11%. Meanwhile, Medical Investor readers are up approximately 7.5% in six weeks.

Of course, we don't sweat short-term gains in Medical Investor. We're seeking long-term gains from the steady growth of the health care industry.

Yet we can boost our gains right out of the gate by focusing on the best... and insisting on a good price.

Good investing,

Rob Fannon
Editor, The Medical Investor