Great stocks on sale

Kiplinger's Personal Finance Magazine, Nov, 1998 by Manuel Schiffres

Opportunities to invest in terrific companies at distress prices don't come often.

Painful as it is in most respects, the first bear market in eight years is a long-awaited blessing for people who would like to make long-term investments in great companies at reasonable prices. Thanks to the bloodletting, many outstanding companies with terrific futures have seen their share prices cut 30%, 40% or even more in just a few months. In short, the great growth stocks of the next millennium are now on sale--a sale you shouldn't pass up.

The key phrase here is "long term." Stocks deliver superior returns over the long haul, but over the short term anything can happen, as recent events bear witness. But if you pick good companies--those that deliver solid and consistent earnings growth--your investments should prosper over time.

But just which stocks should you buy for the year 2000 and beyond? We spoke with two dozen portfolio managers and analysts to identify great growth stocks for years to come. The final cut includes companies from a variety of industries, although those related to health care and technology are the most widely represented. In size, they range from tiny to large. We excluded immense companies because their present size could preclude the magnitude of profit growth we sought. Nine of these 11 companies are currently profitable, and of those, analysts expect long-term earnings to grow by at least 20% annually over the next few years.

One common thread that binds these companies is that their share prices are significantly below their recent highs. If the overall stock market declines and, as is its custom, punishes the best companies along with the worst, take advantage of this rare (and perhaps fleeting) opportunity to scoop them up at even lower prices.

HEALTH CARE PIONEERS

The same imperatives that drove health care stocks in the 1990s should remain operative in the new millennium: an aging global population, major innovations in technology, and a growing worldwide demand for Western medicines and medical devices. A company that should benefit mightily from these long-term trends is Guidant, a maker of devices for treating heart disease.

Shares of Guidant (317-971-2000) haven't exactly gone unrecognized since the company was spun off in 1994 by drug maker Eli Lilly & Co. The stock went public at a split-adjusted price of $7.25 per share, and soared to a high of $90 earlier this year. Its retreat to a recent $75 has stemmed from the stock-market rout and from investor concern over the impending entrance of rival Boston Scientific into the huge, $1.7-billion market for coronary stents--the metal tubes or coils used in angioplasty procedures to keep arteries open. But Guidant is expected to get approval soon for its new Multi-Link Duet stent, which analysts say should allow the company to maintain its leading position.

Guidant's other major product is pacemakers, devices that control heart rhythms. Some of its pacemakers treat slow or irregular heartbeats, while others can be implanted to treat potentially fatal fast heart rhythms with electrical charges. Guidant recently introduced its new Meridian and Discovery pacemakers, and has agreed to buy the cardiovascular-device unit of Switzerland's Sulzer Medica. The pending deal would more than double Guidant's pacemaker business and make it the second-largest competitor in the industry, behind only Medtronic.

An array of new products will drive Guidant's growth in the new millennium, says John Schroer, manager of Invesco Health Sciences fund. In particular, Guidant is testing a device for treating congestive heart failure. Congestive heart failure has a high mortality rate, and any therapy that would allow bedridden patients to live longer and improve the quality of their lives would be a blockbuster, says Schroer. He expects Guidant to win approval for the product in Europe in 1999 and in the U.S. by 2000 or 2001.

Guidant should experience earnings growth of 21% annually over the next three to five years, according to the consensus of analysts surveyed by First Call (the source of all earnings estimates in this article). Guidant is expected to earn $2.35 per share this year and $2.65 in 1999. One of only two companies among those featured here to pay a dividend, Guidant disburses 5 cents per share annually.

In the old west, surgery was sometimes performed on a dusty saloon bar, using cheap whiskey as both disinfectant and anesthetic. Techniques in sterilization (not to mention surgery) have come a long way, and Steris Corp. (440-354-2600) is at the forefront of this burgeoning field.

Steris was founded in 1987 to commercialize a chemical sterilization process for surgical and diagnostic devices. A year later, it launched its flagship System 1, a low-temperature desktop sterilizer that is sold to hospitals and physicians' offices around the world.

Starting in early 1996, Steris embarked on a shopping spree. It merged with Amsco International, a much larger maker of sterilizer washers, surgical tables and accessories. In short order, Steris bought four other companies, one of which, Isomedix, is a player in the emerging field of preventing harmful bacterial growth in food. As a result of all this consolidation, Steris's revenues soared from $91 million in the year ended March 31, 1996, to $720 million for the year ended March 31, 1998. During this period, earnings nearly tripled, from 33 cents to 94 cents per share.