Shares: The best of health can bring benefits

INVESTORS who want to make money fast over the next few years should make sure they have a significant part of their portfolio in health-care.

This may seem odd to investors who follow the US stock market closely and are aware that so far in 1992 health-care stocks have been a disaster, with shares such as Merck down over a quarter from the peak. But such a fierce bout of profit-taking is normal in a booming sector. Prices are back to levels where they are starting to look attractive.

The three US shares I am recommending, Stryker Corporation at dollars 31, Biomet at dollars 15 and US Surgical at dollars 57.75, exemplify what has been happening. Each has halved or more on peak levels at the end of 1991. But US Surgical, for example, had risen from less than dollars 10 at the start of 1989, so some profit-taking is not surprising.

P/e ratios had also gone wild. Biomet, which makes artificial joints, and US Surgical, which makes special equipment for use in microscopic surgery, had p/es over 80 in the closing months of 1991. Even now, after their shares have plummeted, p/es on historic earnings are over 40, which will look absurd to many UK investors.

But against that must be set their electrifying growth rates. Biomet's earnings per share since 1989 have been 20 cents, 27 cents, 36 cents and 46 cents, and current year earnings are expected to reach 60 cents to drop the p/e to a pedestrian 25. If some observers are right and earnings are set to reach dollars 1 by 1995, the capital gains potential is dramatic.

US Surgical has a dominant position in the booming laparoscopy market. (Laparoscopy is the use of miniaturised cameras in surgery to lessen trauma and shorten hospital stays.) But there seems to be plenty of scope for growth to continue. On forecasts of group earnings per share rising from dollars 1.58 in 1991 to dollars 2.45 this year and dollars 3.20 next year, the 1993 p/e would be 18, which is near the bottom of the 10-year range.

Stryker straddles the activities of Biomet and US Surgical, making the laparoscopy cameras and replacement joints for hips and knees. It boasts of having increased earnings per share by more than 20 per cent a year for 15 years. This year the rate has accelerated: third-quarter results show sales up 31 per cent and earnings per share up by 47 per cent.

The US has a profusion of exciting health-care stocks but the UK is doing its best to catch up and now boasts some wonderful wild-card stocks for adventurous investors. A quartet of stocks where the risks and the potential rewards are unusually high are ML Laboratories at 830p, Proteus International at 427p, Haemocell at 174p and just-floated Tepnel Diagnostics at 168p. None of these stocks has any earnings, yet they already command heady valuations. ML Laboratories is valued at pounds 250m, for example, or more than a third of the worth put on British Aerospace. But investors should not necessarily be put off by this.

ML Laboratories has a proprietary solution for use in kidney dialysis which looks certain to become a massive seller once it can negotiate the regulatory approval process.

UK, and therefore European, approval could be close. The minute that is achieved, the shares will rocket probably to between pounds 15 and pounds 20 as investors start to do their sums on the sales and profits potential.

Shares in Haemocell nearly doubled recently from 95p on the news that the US had approved its revolutionary blood filtration process enabling patients to have their own blood to be purified and recycled during surgery. The worldwide distribution rights for the Haemocell process belong to Stryker Corporation, which has great hopes for the product in the US where fears over using third-party blood are particularly great. Like Gillette with its razors, the high earning potential of Haemocell's system lies with the disposable purification packs which buyers are committed to purchase.

Proteus, already valued at over pounds 100m, has a proprietary molecular modelling software package that is running on super-computers and has already developed over 30 potential new drugs.

Tepnel has a unique diagnostic system which could be used, for example, to test blood for cervical cancer using DNA rather than smear testing. If approved, the scope is vast.

For investors who can live with a bumpy ride and the obvious risks, all these shares are the stock market equivalent of betting on a single number at roulette. A win will be big.

(Photograph omitted)