Here are three companies in the industry which are leaders in their markets but not attractive as stocks due to their relatively high valuations. And their recent performance suggests that investors will not profit from owning them unless their earnings grow much faster than currently forecast:

• Johnson & Johnson (NYSE: JNJ). Johnson & Johnson is a health care company with 250 operating companies in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. In the most recent 12 months sales were $58.8 billion having grown an average of 10.5% over the last five years and it earned $10.4 billion growing at a 14.3% CAGR. JNJ trades at a P/E of 19.4, has risen 3.4% in the last year, and is expected to earn $4.13 per share 2007 and $4.42 in 2008, up 7.2%. At a Price/Earnings to Growth (PEG) ratio of 2.7, JNJ looks expensive to me.
• Medtronic Inc. (NYSE: MDT). Medtronic, Inc. functions in eight operating segments that manufacture and sell device-based medical therapies: Cardiac Rhythm Disease Management, Spinal and Navigation, Vascular, Neurological, Diabetes, Cardiac Surgery, Ear, Nose and Throat, and Physio-Control. In the most recent 12 months sales were $12.6 billion having grown an average of 13.9% over the last five years and it earned $2.97 billion growing at a 23.3% CAGR. MDT trades at a P/E of 20.5, has fallen 5.2% in the last year, and is expected to earn $2.53 per share in the fiscal year ending (FYE) April 2008 and $2.97 in FYE April 2009, up 17.2%. At a PEG ratio of 1.2, MDT looks a bit expensive to me, although it's the least expensive of the lot, its growth forecast is slower than its last five years' performance -- not encouraging for investors.
• Patterson Companies (NASDAQ: PDCO) is a different company from the first two -- focusing on distribution of health care related -- dental, pet, and "non-wheelchair assistive" -- products. More specifically, Patterson Companies, is a distributor serving three markets: North American dental supply; United States companion-pet (dogs, cats and other common household pets) and equine veterinary supply, and the worldwide rehabilitation and non-wheelchair assistive products supply market. In the most recent 12 months sales were $2.9 billion having grown an average of 14.6% over the last five years and it earned $213 million growing at a 16.9% CAGR. PDCO trades at a P/E of 20.4, has fallen 12% in the last year, and is expected to earn $1.68 per share 2007 and $1.88 in 2008, up 12%. At a PEG ratio of 1.7, PDCO looks expensive to me. I'd avoid it.

What do you think of these three? Any ideas for better health care industry investments?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.