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Stock Strategist

Five Great Health-Care Stocks

These wide-moat firms can provide stability amid uncertainty.

With big recent drops in stock markets around the world and even the venerable Alan Greenspan warning of a potential recession in the near future, investors have been eyeing asset classes, like Treasury bonds, to shield them from riskier investments. We don't think investors have to abandon stocks to escape the effects of a potential downturn, though. In fact, one of our favorite sectors--health-care--often withstands economic downturns without any damage to operating results. The health-care sector also boasts several wide-moat firms in 5-star territory right now. Click  here to see a list of our favorite health-care firms from both a competitive and valuation standpoint.

Health-care stocks are often brought up when the economy's health is in question because demand for most medical treatments doesn't fluctuate with economic cycles: Injuries and illnesses occur whether the economy is booming or busting. Unlike many industries in which the end users, especially consumers, can wait to buy a new car, couch, or computer, delaying medical treatment can result in death for seriously ill patients. Given that grim reality, demand for health-care therapies tends to grow steadily even when the economy shifts into a lower gear.

Our favorite health-care firms benefit from those trends by supplying patients and physicians with a variety of treatment options during medical crises. Health-care firms typically dig wide economic moats around a broad set of patent-protected products, extensive salesforces, and the ability to develop new products once patents on older ones expire. We think the following firms should be able generate high returns on invested capital over the long run based on these abilities, and we think these firms' shares offer compelling investment opportunities right now, even if the economy is forced to navigate rough waters in the near term.

Amgen (AMGN)
Economic Moat: Wide
Business Risk: Average
From the  Analyst Report: "An impressive lineup of blockbuster drugs places Amgen at the head of the biotech class. Despite ongoing reimbursement concerns and new competition from branded and generic biologics, we believe the firm's competitive advantages are still strong. Amgen's wide economic moat, based on its rich pipeline and solid foundation of approved drugs, helps shield the firm from long-term adversity."

Boston Scientific BSX
Economic Moat: Wide
Business Risk: Average
From the Analyst Report: "Boston has proved to be a fierce competitor when it comes to innovation. The firm already launched its next-generation drug-coated stent in Europe last year, with a domestic launch expected in early 2007. Aside from heart devices, Boston has several new products planned for endoscopy, neuromodulation, and neurovascular intervention. We think the firm will apply its innovation knack to the new CRM business, too."

Johnson & Johnson (JNJ)
Economic Moat: Wide
Business Risk: Below Average
From the Analyst Report: "J&J aims to be a leader in each business in which it operates, and this goal permeates the organization. The company has achieved this in numerous markets, claiming the number-one or -two position in medical devices, over-the-counter medicines (including its pending acquisition of  Pfizer's (PFE) consumer products business), and several pharmaceutical markets...This diverse revenue base has helped insulate J&J from the highs and lows that affect its pharmaceutical competitors from time to time. As a result of this and its acquisition strategy, the firm has reported more than 70 years of sales growth and churns out free cash flow (operating cash flow less capital expenditures) reaching almost 20% of sales. This excellent cash generation has enabled the firm to grow its dividend for the past 44 years, a trend we expect to continue."

Medtronic (MDT)
Economic Moat: Wide
Business Risk: Below Average
From the Analyst Report: "This wide-moat company's vision is to establish a significant presence in chronic diseases, in addition to its historical stronghold in heart disease. Investments in neurological, diabetes, and spinal products from the middle to late 1990s have paid off in spades, offering new revenue streams and taking some pressure off heart products. Revenue from those three product areas inched up from 25% of total sales in fiscal 2000 to 35% in fiscal 2006."

Novartis NVS
Economic Moat: Wide
Business Risk: Below Average
From the Analyst Report: "Historically, the pharmaceutical and generics industries have been at odds, each trying to win a larger share of the profits from manufacturing drugs in a zero-sum game. But at Novartis, these two businesses not only coexist, they feed off each other. Its pharmaceutical business has the inside scoop on how to protect its patents from generic challengers, and Sandoz has exceptional manufacturing expertise in difficult-to-make drugs. Further, as growth slows in the branded drug market, Sandoz is well-positioned to benefit from the double-digit growth we expect in the generic drug industry. Market-leading drugs like Diovan for hypertension and Gleevec for leukemia should also help Novartis' branded pharmaceutical business grow faster than its peers."

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