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Adding to a Health Care Play on a Pullback

This best-of-breed company has many growth drivers, and we'll seize this opportunity.
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We wrote yesterday that we were looking for Abbott Laboratories (ABT) shares to pull back before we add to this best-in-breed health care play. With the stock down 1%, we'll buy 100 shares at $32.95.

We will get an update on the strategy of the new Abbott without its pharmaceutical division (now called AbbVie (ABBV) ) next Tuesday when the company presents at an industry conference. We expect the company to outline double-digit earnings, high single-/low double-digit earnings and its opportunities for 200 to 400 basis points of margin expansion. It will do this by expanding its emerging-markets exposure (40% of total revenue) and its largest segment, consumer nutritionals, as well as introducing new products in diagnostics.

Given Abbott's strong geographic exposure and solid product portfolio, we see the company growing twice as fast as its peers. We also believe the company will outline what its plans are for its $3 billion in annual cash flow, which should result in more mergers and acquisitions, buybacks and a dividend increase. The knock is the valuation at 17x forward estimates, but we feel the superior growth profile, strong management execution and a flexible balance sheet justify the valuation, and since the stock is down 1% today, we'll take advantage.

We'll continue to add on the declines to further build this position back up in the portfolio. After our trade, we'll own 1,500 shares of ABT, or 1.7% of the portfolio.

Separately, KeyCorp (KEY) was downgraded today by a boutique firm, and the stock is down around 1%. We would be buying shares today if we weren't restricted. The downgrade was based on valuation, which we totally disagree with, as this is one of the cheapest regional banks in the sector at 0.8x tangible book value.

After KeyCorp has lagged the industry in 2012 and also its biggest rival, U.S. Bancorp (USB) , by 1,000 basis points, we see 2013 as the year for catch-up, driven by its cost-cutting efforts, solid loan growth and superior trends in net interest margin. We will add when we can.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long ABT and KEY.

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