U.S. health care stocks: Scanning for upside potential

What are we looking at?

U.S. health care stocks with long-term upside potential.

The screen

We limited our pool to the S&P 100 Index.

To find the most promising, we looked at each stock's 40-week moving average (40wMA). This is the average closing price for the stock over a period of 40 weeks. Charting the moving average week by week gives us a sense of investor's behaviour: Are they growing more (or less) enthusiastic about the company's outlook and are they more (or less) likely to purchase the stock?

Generally speaking, stocks that trade above their rising 40wMA are the best candidates for investments; they are the ones that show a bullish pattern. We identified the status of each stocks average (rising, falling or flat) in the table below.

We chose this indicator because stocks tend to stay relatively close to their 40wMA. When stocks rise far above this average, investors often use this as an opportunity for profit-taking, since this usually leads to a price correction toward the 40wMA. Similarly, when stocks decline far below this average, suggesting a change in trend, investors can usually expect a recovery rally to follow toward the average, which also provides a selling opportunity.

More about Phases & Cycles

Phases & Cycles Inc. has been providing independent research for over 24 years, using behaviour analysis. It publishes investment ideas for both the Canadian and U.S. equity markets. Its research reaches more than 1,000 users across North America and Europe.

What did we find?

Of the 11 stocks that have a "rising" 40wMA, Amgen, Biogen Idec, Gilead Sciences and UnitedHealth Group are significantly above their 40wMA, suggesting a minor price correction may occur toward their average. At the same time, Baxter International is closest to its 40wMA suggesting it is currently at a good entry level.

At the same time, Bristol-Myers Squibb and Pfizer have a falling 40wMA, suggesting these stocks are already in a down-trend.

In the adjoining table we summarize our findings.

Ron Meisels is the director of research and Monica Rizk is the senior technical analyst for Phases & Cycles Inc. (www.phases-cycles.com). They may hold shares in companies profiled.