RMD Resmed Inc

Derek Taner is on the hunt for health-care stocks that are out of favor due to company stumbles, but with potential to bounce back strongly.

Taner manages the $1.1 billion Invesco Global Health Care fund (GGHCX), whose year-to-date returns of 17.1% outpace the average return for health-care funds tracked by Morningstar, as well as the Standard & Poor's 500 Index.

"Our sweet spot has been to try to focus on companies that for whatever reason have stubbed their toe," said the San Francisco-based Taner. "We pick a stock with the idea that 18 months or two years out, the problems are fixable. The company still generates lots of cash ...and at some point that'll come back into favor."

One example he cites is Quest Diagnostics Inc. (DGX), which provides diagnostic and laboratory services. The stock's performance has trailed that of rival Laboratory Corp. of America Holdings (LH), partly because Quest's acquisitions in recent years haven't boosted earnings as much as Lab Corp.'s, Taner said.

But he sees few other reasons to justify why Quest shares should trade at a discount to Lab Corp.'s--Quest trades at 13 times projected full-year earnings while Lab Corp has a 16 times multiple. He sees improved financial results in the second half of the year propelling Quest shares.

Quest shares have bounced back from a trough in the mid-40s last summer, trading recently around $57.65.

Taner also likes medical-equipment maker CareFusion Corp. (CFN). He said the business wasn't being managed as profitably as it could have been, but the company in February named former ResMed Inc. (RMD) chief executive Kieran Gallahue as its new CEO. Taner expects Gallahue to cut costs and take other steps to improve profitability.

CareFusion shares have bounced back to around $28.57 in recent trading from a low of $20.63 in July.

Not every holding in Taner's fund fits the profile of out-of-favor stock waiting to bounce back. He also likes Amarin Corp. (AMRN), which is developing the drug AMR101, designed to lower high triglycerides. High triglycerides are a risk factor for heart-related problems.

Amarin's American depositary shares have skyrocketed to $18.77 in recent trading from as low as $2.02 in July thanks to the release of positive results of clinical trials of the drug. Taner thinks the drug can generate annual sales exceeding $2 billion if it's cleared by regulators.

Taner has mostly avoided large pharmaceutical stocks because most are facing patent expirations for top-selling drugs, which will trigger sales-eroding generic competition. He does, however, like Teva Pharmaceutical Industries Ltd. (TEVA), the biggest stand-alone generic-drug maker.

-Peter Loftus, Dow Jones Newswires; +1-215-982-5581; peter.loftus@dowjones.com

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