When Investing In Health Care Focus On The Merits Of Individual Companies Rather Than The Entire Sector - Here's Why

Written by Kate Moore

Health care stocks have historically traded at a premium to the broader equity market, partly reflecting their growth characteristics and popularity as a source of income yet, today, some sub-industries such as biotech sell at a discount. Many trade near the bottom of their historical valuation range, as the Bargain bin chart shows.

 

Is health care a buy? We think a selective approach is appropriate... The health care sector is made up of haves (those with potential category-killer medical products including drugs, devices, and diagnostics) and have-nots (companies in areas that face generic competition or product obsolescence). An appropriate strategy is focusing on the merits of individual stocks rather than the attributes of the entire sector...

With most large-cap pharma companies in the mature stage of product development, many are seeking to buy growth. U.S. tax reforms encouraging repatriation of overseas cash could trigger a surge in mergers and acquisitions. Pharmaceutical companies will dominate M&A in 2017 if history is a guide.

We see opportunities in biotech, medical device makers, U.S. managed care companies and selected big pharma with promising drug pipelines.

Investors can:

•  either wait for a catalyst such as a takeover (selected small and mid caps)
• or pocket steady dividends until the market re-prices the value of a pipeline.

Bottom line

When investing in health care, it’s important to be selective.