3 Unloved Stocks to Break Out, Jensen Says

Health-care stocks barely budged last year as worry over legislation kept them from joining the broader equity-market rally. Robert Zagunis, manager of theJensen Fund(JENSX_), says this year will be different, especially for companies such asMedtronic(MDT_), Abbot Labs(ABT_) and Stryker(SYK_).

The $3.8 billion mutual fund has returned 12% over the past year, putting it in fund-trackerMorningstar's(MORN_) 78th percentile. Over the past 10 years, the Jensen Fund has risen an annual average of 4%, better than 88% of its Morningstar rivals.

Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

Health care was the worst-performing sector in the S&Pin 2010. Why do you think it will do well this year?

Zagunis: There are some companies that are going to be winners in that sector with all the turmoil going on in health care. Our position is that it will be economics, not legislation, that is going to fix the health-care system. Effectively, we are seeing larger and larger buying groups forcing price concessions from some of the vendors. So what you are looking for are companies that have products that are well-received and that can provide a wide range of products and have some margin to give. It's effectively a trade-off of volume for margin.

Is it better to be in the device manufacturers, like Medtronic, as opposed to Big Pharma?

Zagunis: It is compared to what it was like a year ago. The application of a lot of their products was held up in part because of the economy. A lot of people would defer some of their elective surgeries up to a point because they were feeling poorer. Two things have happened since then. The economy has gotten better and the need for that operation has become more acute. So the use and need for those products have improved. And, at the same time, Medtronic is expanding internationally in a very good way. And, like all our companies, they come from a very strong financial position.

Why do you like knee-and-hip-implant-specialist Stryker? Is it the "aging of America" argument?

Zagunis: The demographic argument certainly provides support for the stock. Stryker is dedicated to research and development to make sure they have the best products available for orthopedic implants. And they have been doing a very good job with that. The addition with Stryker is that they have a remarkably strong balance sheet with over $10 in cash per share on their balance sheet and no debt. They also have expansion plans that support performance in the next several years.