Late, But Not Too Late, For Healthcare

There's nothing quite as annoying as being basically right about something and making no money from it. I was pounding the drum for most of 2010 that healthcare was too cheap and that it was a good time to buy some undervalued companies.

Sure enough, stocks like Hologic (Nasdaq: HOLX), Varian (NYSE: VAR), Accuray (Nasdaq: ARAY), Bruker (Nasdaq: BRKR), Cepheid (Nasdaq: CPHD), and Volcano (Nasdaq: VOLC) have all done quite well. And how many of these did I buy? Oh yeah, that's right … none. I kept my shares in Johnson & Johnson (NYSE: JNJ) and added some Alnylam (Nasdaq: ALNY), but didn't add any of the other names I said I liked.

Lucky for me, though, it may not be too late. Looking around the sector, I'm still seeing some interesting valuations on names I like. There are not as many 30%+ undervalued stocks as six months ago, but still a decent collection of ideas.

Here are some of the names I've been looking at lately and seriously considering:

BioMimetic Therapeutics (Nasdaq: BMTI) – I absolutely love this company's product for treating non-union fractures, and I think the overall technology platform as a lot of promise in orthopedics and sports medicine. Moreover, orthobiologics has been a Holy Grail for years and only Medtronic (NYSE: MDT) has really gotten anywhere with it. If approved, BMTI could have a great market opportunity in front of it – though it would more likely get a buyout bid from a larger company like JNJ or Stryker (NYSE: SYK) that needs the growth and the product niche.

Unfortunately, BMTI is offering new technology and I'm scared to death of what the FDA is going to do with this. There is a tiny risk of cancer with these growth-stimulating products and even though BMTI appears to be safer than already-approved products, does anybody want to bet on the FDA taking an enlightened view of this? After all, it seems like the FDA has the attitude that any risk outweighs virtually any benefit. Still, with a panel meeting on May 12 the picture will clear up considerably. I'd like to own this one, but there's a better than fair chance the FDA will torpedo this product.

Covidien (NYSE: COV) – Nobody is more surprised that I like this stock than me. Covidien has long been a boring, not especially well-run company. But it seems like there's a new day at Covidien, and a host of deals done in 2010 should start paying real benefits and giving the company a shot at some decent growth. Covidien is what JNJ might be if management at JNJ wakes the hell up (and I never thought I'd be suggesting that JNJ needs to emulate Covidien). If Covidien can grow the top line at 5% and produce free cash flow margins in line with the industry norms, this is a $60 stock.

Palomar (Nasdaq: PMTI) and Solta (Nasdaq: SLTM) – Aesthetics will come back. These are the companies to own when it does. But judging by Allergan's (NYSE: AGN) recent guidance, the aesthetics market has not come roaring back yet.

Stryker – I've beaten this drum a lot. But I think this stock might actually be worth upwards of $80. Management seems hell-bent on finding ways to grow, and now has clearly opened the door to expanding into markets beyond orthopedics and surgical equipment. I don't know what's next for this company, but it's one I still want to own.

TomoTherapy (Nasdaq: TOMO) – Risky, but really interesting. I need to do a separate write-up on this one to really do it justice.

Abbott Labs (NYSE: ABT), Roche (Nasdaq: RHHBY), and ISTA Pharmaceuticals (Nasdaq: ISTA) – This post is probably getting unbearably long already, but these are three pharmaceutical (mostly) names where I still see some real value. Abbott has suffered as investors worry about competition for Humira. It's a valid worry, but one I think the company can navigate. Roche … well, Roche continues to underwhelm, but I think there's promise in the pipeline, value in the diagnostics business, and a left-for-dead valuation in the shares. ISTA is one of the only pure-plays left in eye care and looks like a winner whether it gets a bid or stays independent.

So that's a quick rundown on what I'm seeing in the med-tech space, but I didn't even touch biotechnology or life sciences. That will have to wait for another day. In the meantime, I'm seriously considering adding one or more of these names to my own portfolio. It's still easier to hold names in materials and industrials, but good healthcare stocks can still outperform and eventually the markets will wake up to these names.

Disclosure: I own shares of Johnson & Johnson and Alnylam