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MarketocracyI have always attempted to find a simple way to screen for strong stocks that will make one money over time.  Obviously, we want to outperform Mr. Market, because why put the time and effort into stock picking if we cannot do better than an index fund?

Beginning in 2004, I started the “Barnacle Health Care Fund“.  It was based on a simple scoring system that preferably looked for companies that had:

  • Return on Equity > 20%
  • Price to Book < 1.5
  • Price to Sales < 1
  • Free Cash Flow
  • Current Ratio > 2
  • Quick Ratio > 1
  • Inventory Ratio < 1.25
  • Net Margins > 10%
  • Gross Margins > 60%
  • Debt to Equity < 1
  • Adequate trading volume

Each criteria was given a number of points.  The most possible points is 14.  I use a similar technique for my Metals Fund and Energy and Utility Fund.

I will say that this works.  Since 2004, the Health Care Fund has averaged an annualized 11.23% return.  The S&P 500’s annualized return during that same period is 8.57%.  It also outperforms the Dow Jones U.S. Health Care Index at 9.32% during the same period.

Health Care Fund

So, in my reviving my funds, I reran the screen, and these are the candidates that will be added to the fund.

Ticker Company Industry Country
ABBV AbbVie Inc. Drug Manufacturers – Major USA
ANIK Anika Therapeutics Inc. Biotechnology USA
BRLI Bio-Reference Laboratories Inc. Medical Laboratories & Research USA
CELG Celgene Corporation Biotechnology USA
COO The Cooper Companies Inc. Medical Instruments & Supplies USA
COV Covidien plc Medical Instruments & Supplies Ireland
CYBX Cyberonics Inc. Medical Appliances & Equipment USA
EW Edwards Lifesciences Corp. Medical Appliances & Equipment USA
GENT Gentium S.p.A Drug Manufacturers – Other Italy
GMED Globus Medical, Inc. Medical Appliances & Equipment USA
INCY Incyte Corporation Biotechnology USA
ISRG Intuitive Surgical, Inc. Medical Appliances & Equipment USA
JAZZ Jazz Pharmaceuticals plc Biotechnology USA
JNJ Johnson & Johnson Drug Manufacturers – Major USA
LLY Eli Lilly & Co. Drug Manufacturers – Major USA
MASI Masimo Corporation Medical Appliances & Equipment USA
MDT Medtronic, Inc. Medical Appliances & Equipment USA
MSA Mine Safety Appliances Co. Medical Appliances & Equipment USA
NVO Novo Nordisk A/S Drug Manufacturers – Other Denmark
PFE Pfizer Inc. Drug Manufacturers – Major USA
PRGO Perrigo Co. Drug Related Products USA
QCOR Questcor Pharmaceuticals, Inc. Biotechnology USA
REGN Regeneron Pharmaceuticals, Inc. Biotechnology USA
RGEN Repligen Corporation Biotechnology USA
RMD ResMed Inc. Medical Appliances & Equipment USA
TARO Taro Pharmaceutical Industries Ltd. Drug Manufacturers – Other Israel
USNA USANA Health Sciences Inc. Drug Related Products USA
UTHR United Therapeutics Corporation Drug Manufacturers – Other USA
VAR Varian Medical Systems Inc. Medical Appliances & Equipment USA
VIVO Meridian Bioscience Inc. Diagnostic Substances USA

All of these companies score at least 12 points, and none scored 14 points.  While there are no perfect candidates, it does have a lot of attractive options if one wants to add some health care presence in their portfolio.

For disclosure purposes, I recently sold my personal position in Questcor Pharmaceuticals (NASDAQ:  QCOR).  With some of the noise coming out of Citron’s Andrew Left, and the volatility it has shown, it no longer fits into my personal risk tolerance profile.  Other than that, I have no activity with these companies.

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