3 Health Care Picks To Beat Earnings

Ebola virus disease fears coupled with the lack of any approved treatment for Ebola has brought the spotlight on health care companies like Tekmira Pharmaceuticals Corp. ( TKMR ), Johnson & Johnson ( JNJ ) and GlaxoSmithKline ( GSK ) among others researching on Ebola vaccines or treatments. U.S. government agencies are working closely and providing support as well as funding to the companies developing vaccines/treatments targeting Ebola. With investors glued on Ebola vaccine/treatment related updates, companies working on Ebola therapies stand to make the most of the current furor.

On the other hand, tax-saving reverse mergers, which had until recently become a rage, have somewhat fizzled out owing to uncertainty surrounding proposed changes in U.S. tax laws. Earlier this month, AbbVie Inc. ( ABBV ) abandoned its plans to acquire Shire ( SHPG ) on proposed anti-inversion policies. The deal, valued at approximately $54.5 billion, was set to complete by year end.

However, tax saving is not the sole motivation behind reinvigorated M&A activities in the health care sector currently. Cash-rich companies are on the lookout for other players that have a portfolio of potential multi-million dollar products or lucrative pipeline candidates. Valeant Pharmaceuticals International, Inc. ( VRX ) is looking to acquire Allergan ( AGN ) to strengthen its portfolio. However, Allergan has stated that Valeant's latest acquisition offer significantly undervalued the company. Another company rumored to be interested in Allergan is Actavis ( ACT ).

Despite the patent cliff being mostly over, some health care companies have continued to witness declining sales in the third quarter of 2014 owing to genericization. Several health care companies now have fewer blockbuster products. Increasing competition for legacy products in the form of newer therapies is also affecting sales. Merck ( MRK ) and Glaxo reported disappointing revenues in the third quarter - the former due to patent expiries of key products and the latter facing the brunt of increasing competition for Advair.

Health care companies have been resorting to share buybacks, restructuring, streamlining of operations, divestment of non-core/redundant assets to boost the bottom line. Amgen ( AMGN ) has initiated a company-wide restructuring, which involves the reduction of 20% of its workforce and approximately 23% of the facilities footprint by the end of 2015.

Some of the companies are also increasing their dividends to increase shareholder returns.

Thus, it may be a good idea to look at some companies in the health care sector that have the potential to beat earnings in their upcoming releases. These stocks are well positioned in today's market environment, and could see considerable upside riding on the aforementioned trends. An earnings beat should help these stocks gain investor confidence and show a favorable price movement.

How to Pick?

Given a large number of industry participants, pinpointing stocks that have the potential to beat estimates could appear to be a daunting task. But our proprietary methodology makes it fairly simple. One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Zacks Earnings ESP .

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3 Health Care Picks To Beat Earnings - Earnings ESP