Tickers in this Article: FHCO, CHSI, MGLN, SXCI, USNA, CYH, CVH, RX, UHS, CAH
America is currently undergoing a massive debate about its healthcare system. Although this is definitely a serious issue, I'm finding it a little too serious and I need to have some fun. Thinking of the possibilities, I believe the best thing to do is to cobble together a "Healthy Portfolio." This won't necessarily be a group of stocks making you healthier; rather, it will be 10 stocks with the word "health" somewhere in the corporate name. A big believer in buy and hold investing, I'll do my best to make sure you can hold this portfolio forever.

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Selecting "Healthy" Companies
Using Yahoo! Finance, I was able to generate a list of 27 stocks with the word health in their corporate name and a share price above $5. By removing five stocks trading over the counter or on the pink sheets, we're left with 22, which isn't too large a group to choose from. The next problem will be figuring out how to pick the stocks. Generally, I like to see every market cap represented, especially when you are dealing with one specific industry. Unfortunately, in this specific group there are two micro caps, 13 small caps, six mid caps and one large cap. While I'm tempted to include both of the micro caps as well as the large cap in the portfolio, in order to even things out I'll only take one of the micros along with the large cap, leaving me to choose four small caps and four mid caps. Nine small caps, two mid caps and one micro cap will not make the cut.

The Losers
I'll start with small caps. Before I look more closely at some of these companies, my first task will be to cut those small cap stocks whose trailing twelve month EPS is negative. I'm able to snare three: Genomic Health (Nasdaq:GHDX), WellCare Health Plans (NYSE:WCG) and InVentiv Health (Nasdaq:VTIV). I don't care what their stories are, they're out.

This leaves me to cut six more, which I will do according to their price-to-sales ratio. I understand companies in one industry may have P/S ratios significantly higher or lower then others. It's my experience, however, when comparing apples to oranges that this ratio works especially well. Cutting those stocks with a price-to-sales ratio above four - National Health Investors Inc. (NYSE:NHI), Universal Health Realty Income Trust (NYSE:UHT) and WebMD Health (Nasdaq:WBMD) - leaves me with just three more. Not a fan of leverage, I'm axing those that have total debt greater than EBITDA. Amazingly, exactly three fit the bill: Gentiva Health Services (Nasdaq:GTIV), Health Management Associates (NYSE:HMA) and Health Net (NYSE:HNT). The small cap table is set.

Mid and Micro Caps
Cutting two mid caps and one micro cap and the Healthy Portfolio is good-to-go. As it happens, two mid caps of the six to choose from have price-to-sales ratios above four; Health Care REIT (NYSE:HCN) and Nationwide Health Properties (NYSE:NHP) are gone. All that is left is one micro and I choose the Female Health Co. (Nasdaq:FHCO), manufacturer of the world's only female condom. In April 2008 the stock was trading at $2.50 and even though it is now around the $7 mark, its genuine benefit to society will continue to move the stock upward. The portfolio is set. (For more on selecting a diversified group of stocks, check out Modern Portfolio Theory: An Overview.)

The Healthy Portfolio
Company
Market Cap
% Change 52-Weeks
Female Health Co. (Nasdaq:FHCO)
$179.84M
76.23
Catalyst Health Solutions (Nasdaq:CHSI)
$1.25B
-16.99
Magellan Health Services (Nasdaq:MGLN)
$1.11B
-26.04
SXC Health Solutions (Nasdaq:SXCI)
$1.01B
177.47
USANA Health Sciences (Nasdaq:USNA)
$516.01M
-5.47
Community Health Systems (NYSE:CYH)
$2.82B
-10.55
Coventry Health Care (NYSE:CVH)
$3.40B
-40.04
IMS Health (NYSE:RX)
$2.43B
-40.36
Universal Health Services (NYSE:UHS)
$2.84B
-5.44
Cardinal Health (NYSE:CAH)
$11.79B
-38.69
The Winners
I've already discussed some of the winners so I'll talk a bit about the other holdings in the portfolio. Catalyst Health Solutions is a pharmacy benefits manager (PBM) with 5 million members whose second-quarter revenues were up 17% to $717.6 million and net income 35% to $16.2 million. Full-year guidance is for earnings per share (EPS) of $1.45 to $1.50, giving it a forward P/E of 16.

Specialty HMO Magellan Health Services experienced a 3% drop in revenues in Q2 along with a 15% drop in earnings. Management reaffirmed 2009 EPS with a wide range between $2.04 and $2.59. Its enterprise value is currently five times EBITDA, which is quite low.

Anyway you slice it, the second quarter was a beauty for PBM SXC Health Solutions. The company blew the roof off sales and earnings, upping 2009 GAAP EPS guidance from between 93 cents and $1.01 to $1.42 and $1.50. It's slightly more expensive than Catalyst Health with a forward P/E of 23.

Nutrition supplements direct-marketer Usana must be doing something right. Canaccord Adams upgraded it from "Hold" to "Buy" on July 31. On the topic of analysts, Stifel Nicolau analyst Robert Hawkins likes long-term acute care hospital operator Community Health Systems. On June 29, Barron's wrote that Hawkins felt companies like Community are in good shape despite President Obama's healthcare reform threats.

HMO Coventry Health Care's shares jumped more than 10% July 28 on news it was upping its full-year EPS guidance to between $1.85 and $1.95. But not so fast, two analysts downgraded health care information provider/consultant IMS Health on July 24.

Back To The Good News
Hospital owner Universal Health Systems Q2 earnings were off the charts, up 55% to $1.64 from $1.06 a year earlier. They too are confident about the remainder of the year. Lastly, we have large cap Cardinal Health, a distributor of pharmaceuticals and medical products. Cardinal's big news is its August 31 spin-off of its CareFusion medical products division. Each shareholder will receive half a share in the new company for every Cardinal share held. This gives the Healthy Portfolio an eleventh stock. (Learn how to find a healthy pharmaceutical investment in a market full of weak drugs Measuring The Medicine Makers.)

Bottom Line
I had fun putting this together and while don't expect any readers to actually put the Healthy Portfolio into play, I wouldn't be surprised if five years from now these stocks are all doing nicely. Selecting a few from the list could add a couple of stocks that you may have not considered before this article.

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