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Invest in HealthCare!

Written by: Sean Hyman

Article Overview: In 3 of the past 4 market rebounds since 1982, equity gains slowed to a single digit pace in the 2nd year, after the initial rally. Now dividend stocks have extra appeal because they offer a tempting alternative to CDs.

Invest in HealthCare!

In 3 of the past 4 market rebounds since 1982, equity gains slowed to a single digit pace in the 2nd year, after the initial rally. Now dividend stocks have extra appeal because they offer a tempting alternative to CDs which pay virtually no interest at all, and long term bonds which pay a little bit more but leave you at the mercy of inflation.

Established value companies in stable industries have usually proven a better long-term investment. Before S&P cut Pfizer (PFE) ratings to 'AA' from 'AAA' on Oct 16, 2009, there were 5 companies with AAA credit ratings: Automated Data Processing (ADP), Johnson & Johnson (JNJ), ExxonMobil (XOM) and Microsoft (MSFT). In other words, 2 out of 5 were healthcare companies.

Major HealthCare Companies

I covered healthcare plans stocks such as UnitedHealth Group (UNH) in my Oct 27's article. The following are major healthcare companies in other subsectors inside the health care sector, sorted by yield:

Name (Symbol) Industry P/E Forward P/E Yield

LILLY ELI CO (LLY) Drug Manu. N/A 8 5.2%

BRISTOL-MYERS SQ (BMY) Drug Manu. 13 12 4.8%

GLAXOSMITHKLINE (GSK) Drug Manu. 13 12 4.6%

MERCK CO INC (MRK) Drug Manu. 10 10 4.2%

SANOFI-AVENTIS SA (SNY) Drug Manu. N/A 8 3.6%

PFIZER INC (PFE) Drug Manu. 15 8 3.4%

JOHNSON AND JOHNS (JNJ) Drug Manu. 14 13 3.1%

NOVARTIS AG ADS (NVS) Drug Manu. 17 13 3.1%

ABBOTT LAB (ABT) Drug Manu. 15 13 2.9%

ALCON INC (ACL) Medical Instru 23 20 2.6%

ASTRAZENECA PLC ADS (AZN) Drug Manu. 9 8 2.5%

BAXTER INTL INC (BAX) Medical Instru 15 13 1.9%

MEDTRONIC INC (MDT) Medical Appliances 25 12 1.9%

NOVO NORDISK A S (NVO) Drug Manu. 18 16 1.1%

Teva Pharmaceutical (TEVA) Drug Manu. 48 12 0.9%

Amgen Inc. (AMGN) Biotechnology 12 11 0.0%

Gilead Sciences (GILD) Biotechnology 18 15 0.0%

Average n/a 18 12

The top 8 companies in the above list yielding more than 3% are all major drug manufacturers. Some of them have single digit forward P/Es. H1N1 could benefit vaccine-makers including Novartis (NVS), Sanofi-aventis (SNY), and AstraZeneca (AZN). On November 25, U.S. health officials said that they are seeing a worrying pattern of serious bacterial infections in swine flu patients, mostly among younger adults not normally vulnerable to them.

In addition to pending health care reform, a common problem facing big pharma is that there are patents which will expire between 2010 and 2012. However, this industry has been looking to fuel growth via acquisitions, including blockbuster deals. Pharmaceutical giants are also looking to pick up some biotech companies to boost their pipelines.

Biotech

Biotechnology probably offers the best level of innovation of any of the healthcare industries. Its P/E is low too. For example, Amgen (AMGN)'s P/E is only 12.

Although my core holdings are boring blue chip dividend stocks, I also allocated a very small portion of my portfolio in promising small caps. China Biologic Products (CBPO.OB) is one of leading plasma-based biopharmaceutical companies in China. For the first nine months of 2009, its total revenue was $81 million, up 142% from 2008. It has $50 million in cash and low debt. However, traded on the OTC bulletin board, the stock price was extreme volatile. It also has derivative liabilities which might potentially affect its future income.

Top 10 HealthCare ETFs ( by Net Assets)

Fund Name (Ticker) Net Assets Earnings Growth Rate (ttm)

Health Care Select Sector SPDR (XLV) 1.93B 8%

Pharmaceutical HOLDRs (PPH) 1.52B 6%

iShares Nasdaq Biotechnology (IBB) 1.35B 16%

Biotech HOLDRs (BBH) 728M 13%

iShares Dow Jones US Healthcare (IYH) 582M 9%

Vanguard Health Care ETF (VHT) 538M 10%

iShares S&P Global Healthcare (IXJ) 439M 9%

SPDR S&P Biotech (XBI) 371M 21%

iShares Dow Jones US Medical Devices (IHI) 269M 13%

PowerShares Dynamic Biotech & Gen (PBE) 183M 17%

Conclusion

During the relatively benign 20-year period prior to 2008, most portfolios accumulated considerable short volatility biases, which looked very attractive to investors as a result of recent positive performance. It was this growing short volatility bias that created so much pain in the current downturn, according to CFA Digest November 2009 issue.

Buying after a 40% decline is not a safe bet for investors. Markets may continue to fall and often have no trouble reaching a bottom at 75% below peak. Recent examples include 1989's Japan Nikkei index, 2000's NASDAQ, 2007's China market and 2008's oil/natural gas prices. So if investors think the environment will remain volatile, they should look for stocks with a lower sensitivity to volatility. Even if they make fewer profits for you on the way up, they lose a lot less on the way back down.

With its forward average P/E of 12 and beta of 0.69, healthcare might be a great defensive sector. For those who need stable income, big pharmaceutical companies may be a good choice.

Disclosure: I have long position on PPH and CBPO.OB. Data is from Yahoo Finance as of November 27, 2009.

To learn more about how to invest in the stock market, please check out our stock trading course!

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Article Tags: aaa credit, abbott lab, amgen inc, amgn, astrazeneca plc, baxter intl inc, dividend stocks, health care sector, lilly eli co, long term investment, medical appliances, medtronic inc, merck co, merck co inc, novartis ag, pfizer inc, sanofi aventis, stable industries, term bonds, unitedhealth group



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