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Tuesday, December 26, 2006

Alpha in Healthcare

As we enter the last week of 2006, projections and forecasts for 2007 are becoming more and more prevalent. One of the recurring themes I’m hearing is that the healthcare sector is primed to outperform in the months ahead. I don’t usually put much credence into projections; in part because our active management strategy has more of a near-to-intermediate term focus and also because we prefer to manage money on quantitative analysis rather than on conjecture.

Nevertheless, as I prepared this post and examined the “buy” recommended issues we analyze, I did see that of our top 50 securities, nine (18%) are in the medical / healthcare sector. That’s a fairly significant percentage by an measure. Unfortunately, only 15.37% of the securities we analyze daily have “buy” recommendations today, which is a testament to the weakening market.

We use the iShares Dow Jones U.S. Healthcare ETF (IYH) in our analysis, which is graphed below. Since late-September, the sector has been relatively range-bound after experiencing a multi-month rally that began in mid-July. Our analytic produced a “buy” recommendation fairly early in the rally, and we saw the sector appreciate by about 7.50% before it was down-graded to “sell” status. In hindsight, the analytic was pre-mature by about three weeks in it’s downgrade, but I can live with that.

Listed below are nine “buy” recommended stocks that investors might look to within the healthcare / medical sectors. Obviously these are very broad sectors, so some of these stocks might be better characterized as biotech or pharmaceutical related. But looking at their returns over the last week its apparent that alpha within these sectors is beginning to emerge, which supports the projections. Several of the stocks below were upgraded very recently, so I suggest patience before allocation. With trading this week likely very muted, and the sector still only carrying a "neutral" recommendation, investors might be better suited waiting a bit before putting any capital to work.

Short-Term Indicators

Long-Term Market Model – Bearish since December 8th.

Asset Allocation – Between 62.50% and 75% invested within the actively-managed, alpha producing portion of the overall portable alpha portfolio.

Beta Exposure and Portable Alpha Generation
Date = Date of AAS “Buy” or “Short/Sell” Recommendation

Top Rated Major Market Derivative – NYSE 100 (NYC 11/6/06)

Top Rated Style-Box Derivative – iShares Morningstar Large Cap Value (JKF 11/29/06)

Top Rated Sector Derivative – No “Buy” Recommended Sectors Today

Today’s Top “Buy” Recommended Stocks

Veritas DGC Inc. (VTS 7/28/06)
Robbins & Myers Inc. (RBN 8/10/06)
Volt Information Sciences, Inc. (VOL 11/6/06)
NBTY, Inc. (NTY 12/5/06)
ElkCorp (ELK 12/4/06)
Bradley Pharmaceuticals Inc. (BDY 8/25/06)
Joy Global Inc. (
JOYG 11/13/06)
Credence Systems Corp. (CMOS 11/6/06)
Martin Marietta Materials Inc. (MLM 11/6/06)
Lexmark International Inc. (LXK 9/21/06)

Today’s Top “Sell” Recommended Stocks

SanDisk Corp. (SNDK 10/20/06)
Jabil Circuit Inc. (JBL 11/15/06)
LCA-Vision Inc. (LCAV 6/7/06)
Whole Foods Market, Inc. (WFMI 11/2/06)
Carpenter Technology Corp. (CRS 10/26/06)

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