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Jason Donville is president and CEO of Donville Kent Asset Management. His focus is growth stocks.

Top Picks:

Valeant Pharmaceuticals (VRX.TO)

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Valeant just reported strong Q3 2015 earnings that beat market estimates. The company also raised its guidance for 2016. While Valeant will need to focus on organic growth as opposed to acquired growth in the future, the fact that the company trades on 8.6x 2016 earnings means that a lot of bad news is already priced in.

Concordia Healthcare (CXR.TO)

Concordia trades on 4.3x 2016 cash earnings and below our projected end of 2016 BVPS. The company is carrying too much debt, but we expect levels to fall quickly in the coming 18 months.

Nobilis Healthcare (NHC.TO)

Dallas-based NHC is not a pharma company, but it has suffered from a hedge fund-led smear campaign that has knocked back its share price severely. Looking into 2016, the company trades on 5.3x cash earnings and boasts a 42-per-cent ROE.

Past Picks: December 24, 2014

CRH Medical (CRH.TO)

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Then: $1.70 Now: $3.88 +128.24% TR: +128.24%

Patient Home Monitoring (PHM.V)

Then: $0.73 Now: $0.44 -39.73% TR: -39.73%

BioSyent (RX.V)

Then: $10.25 Now: $7.00 -31.71% TR: -31.71%

Total Return Average: +18.93%

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Market outlook:

Rather than talk about the general market outlook, I want to address the recent correction in health care stocks. Why have health care stocks sold off so aggressively over the past 60 days in the absence of any meaningful downward earnings revisions?

While the industry wrestles with issues ranging from drug pricing to leverage, the sell-off has still been far greater than was warranted by any change in the fundamentals. Our investigations suggest that, as the sector began to correct in mid-summer, three different market participants were hit particularly hard and therefore experienced aggressive forced selling.

By far the biggest group of forced sellers was retail investors who bought health care stocks on margin. This selling has been massive over the past 45 days and is only now starting to abate. The other two groups of "forced" sellers have been ETFs and volatility funds, each of which were forced to liquidate large positions when the sector's momentum profile suddenly changed. These three groups of forced sellers, all of which need to sell quickly, led to an exaggerated correction which has knocked back many health care stocks by more than 50 per cent in two months.

Given the lack of meaningful earnings revisions throughout this correction, we believe the "real story" behind the correction is more about liquidity and volatility than earnings. If our thesis is correct, then the U.S. health care ETFs like the IBB will bounce back quickly and smaller names in the sector will follow shortly thereafter. For investors who are long the sector but feeling beaten up, our advice is to hang in there.

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