Health-Care Stocks Bandage wounded Investment Portfolios

 

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MarketWatch

13 February 2009 Friday 4:22 PM EST

SECTION: PERSONAL FINANCE; Mutual Funds, investors Weekend

LENGTH: 1333 words


TITLE: Health Care Stocks bandage wounded investment portfolios

Signature: Saturday Mamuda, MarketWatch mailto: smamudi@marketwatch.com.

Saturday Mamuda Finance is a journalist in New York.



NEW YORK (MarketWatch) - At a time when stocks are low across the board, a sector has been strong enough to help mitigate some of the worst losses.

Health-care stocks have performed better than their counterparts in other industries because of steady demand, strong revenue and finance, and expectations of industry consolidation.

While the sector has long been regarded as defensive, it is noteworthy that health care as well as the success is always other defensive sectors have been injured throughout slowdown.

"There are not many places where you can save some money and be at ease now, but health care is one of them," said Dean Kartsonas, manager of Federated Capital Appreciation Fund (FEDEX), which is strongly committed to the sector. "It's a sort of lone wolf."

Other defensive sectors such as telecommunications and consumer staples are facing their own problems, Kartsonas said. Telecoms are under attack from cable operators, while consumer staples have suffered from cash-strapped consumers shunning brands and the strength of the weak dollar international application.

Drugs market

Health care mutual funds are by far the best of a sad band of sector funds, landing in the column and larger rivals so far this year from February 12, according Morningstar, Inc. Investment researcher of health care funds were up 2.8% - the only sector funds other than the technology in the dark.

Health care performance is partly due to the high demand of an aging population.

"People are struggling to reduce their expenditure on health," said Christopher Davis, an analyst at Morningstar.

But there are also structural reasons for the sector improved.

Kartsonas said that while the demand for health care helps companies pay, these companies have strong balance sheets and shares at a reasonable price. Industry observers also expect an increase in mergers and acquisitions on the heels of Roche Holding AG (RHHBY) attempt to buy Genentech Inc (DNA) and Pfizer Inc outright the (PFE ) tie-up with Wyeth (WYE).

"Many large companies have the money, and drugs that are patent at the end," said Kartsonas. Accordingly, they are attracted by competitors with a rich pipeline of new products.

Health care sector mutual funds have lost 16.8% on average in the 12 months to February 12, but is far more than its nearest rival in the sector, public funds, which dropped 31.4% on average, exceeding the 36.5% decline for the Standard & Poor's 500 Index (SPX).

But the results are not strong in all areas of health care.

"Some sub-sectors are less sensitive to recession than others," said Vijay Shankaran, director of Touchstone Health and biotechnology (THBCX Fund).

For example, the Nasdaq Biotechnology Index (NBI) has declined from 12.5% in 2008, while health care providers Morgan Stanley Index (RXH) following hospitals and medical and nursing services, fell by 32 %.

"We are staying away in stocks of companies that sell big-ticket equipment," said Rose Ott, director of health sciences of Algiers (AHSAX Fund).

Accordingly, it is to avoid companies in general, she likes: Intuitive Surgical Inc (ISRG) and Varian Medical Systems Inc (VAR). Intuitive makes the device while DaVinci Robot Varian makes X-ray

Ott said she seeks health care with less capital stocks of equipment and exposure to place greater emphasis on consumables and non-elective - companies such as Covidien Ltd (COV) and CR Bard Inc (BCR). Covidien recorded as medical products, such as connecting tubes, she noted, while Bard is not based on a particular product for its revenue.

Bartlett Geer, director of Putnam Equity Income Fund (PEYAX), said health care is its largest overweight in relation to its reference sector, the Russell 1000 Value Index. One of his favorites is Amgen Inc. (AMGN).

"We are excited about their [experimental] osteoporosis drug, Denosumab," Geer said. He said Amgen was struck with concerns about anemia sales of its drugs, but "these questions have been stabilized. Geer added that Amgen had no net debt and the stock represents an opportunity for growth. "

Touchstone Shankaran name two pharmaceutical companies he likes, in part because their products are not "face pressure on prices." Gilead Sciences Inc (GILD) has the control of HIV drugs that are not the most expensive line item for the patient costs, Shankaran said while Alexion Pharmaceuticals Inc (ALXN) is a drug, Soliris, the first specific treatment for the rare disease paroxysmal nocturnal hemoglobinuria (PNH).

Shankaran echo and Ott said he has as diverse as basic medical providers such as syringes and tubing. These companies, such as Baxter International Inc (BAX) and Becton Dickinson and Co. (BDX), are not only doing better than most of the sector, but also more and more income. Shankaran said what many in this sub-sector is that hospitals must pay for their products, operating costs, rather than capital costs.

Legislative concerns

If there is a cloud on the horizon for the health care sector is the fact that the Democratic Party control of government suggests the reform of the industry is underway. But opinion leaders are divided on what that reform might actually mean for the sector.

Shankaran said the fact that stocks have risen in the area after former Senator Tom Daschle has withdrawn his candidacy for secretary of Health and Human Services reported that the market believes that reform of the sickness industry. For example, while the May profit hospitals in the short term, if fewer patients are uninsured, in the long term, they lose revenue in May as a greater proportion of patients visited by the government rather than insurance plans private. The Government usually pays less.

Shankaran also said that greater government involvement in providing health coverage May force pharmaceutical companies to reduce prices. Ott, noting that some pharmaceutical companies have 75% margins on their sales, agreed in May this happen. But she added that health care and major pharmaceutical producers are major employers in the economy, suggesting that the Government May be reluctant to put too much cost. The industry also has a power of very strong pressure, "she says.

"It is too early to worry about what changes might mean," said Federated Kartsonas. The fact that President Obama has not proposed a new candidate to replace Daschle and his administration to focus on fiscal incentives and rescue banking bills, propose that the reform could be delayed.

But even if there is action, Kartsonas said that the makers of small goods, such as Becton Dickinson and Baxter, stocks remain attractive. "They will not be affected by changing regulations," he said.

Ott added that even if pharmaceutical companies are forced to lower prices, "will not change overnight."

Portfolio requirement

"Everybody should have exposure to health care stocks, said Morningstar Davis. "But few people have health needs of specific mutual funds."

Davis proposed a portfolio of 5% for the sector, and noted that investors with diversified stock funds may already be there, especially since many managers have adopted health care.

But for those who want a greater exposure to this sector, or the diversification of managers do not have a lot of posts of health care, he recommended funding of health care "off the beaten path."

"Big-cap, big pharma-focused funds are not adding much value to portfolios," said Davis.

Morningstar recommends T. Fund Rowe Price Health Sciences (PRHSX) and Vanguard Health Care Fund (VGHCX) - each with a distinct approach for the sector. The fund T. Rowe dives in small firms, while the Vanguard fund's manager, Ed Owens, also uses an approach that against the value. Davis also recommended Fund Jennison Health Sciences (PHLAX), another portfolio with a preference for small caps.

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