As the planet's population swells and ages, healthcare remains a compelling long-term investment theme. Americans alone spent nearly $2.2 trillion on healthcare throughout the second half of this decade or about 16% of the nation's gross domestic product. The story remains comparable in both developed and emerging nations. As the world's population continues to grow and age, a greater focus will need to be put on healthcare. Despite the bullish long-term investment thesis, some sectors of the healthcare market are cheaper than others and may provide better long-term gains.
IN PICTURES: 9 Simple Investing Ratios You Need To Know
70 Million Potential Customers
Analysts estimate that by 2030, more than 4 million knees will need to be replaced in the U.S. alone. This doesn't include the various other heart valves, prosthetics, stents and other body parts that need repairing. With nearly 70 million baby boomers hitting retirement age over the next few years, medical technology may be the best way to play healthcare rather than through pharmaceuticals.
These catheters, artificial elbows and pumps are big business. Medical devices manufacturers spent $9 billion on research in 2009 according to Ernest & Young, more than a 6% increase over 2008. This research is money spent. When Boston Scientific (NYSE:BSX) introduced their first drug coated stent a few years back, the company sold more than $200 million worth in the first month. Overall, the sector produces more than $200 billion in sales annually.
Time to Buy
The time may be right for longer term investors to add the sector to a portfolio. Facing a one-two punch of legislation and recession, many device firms are now trading for less than historical price to earnings ratios. Due to budget constraints, many hospitals have chosen to hold off on big purchases and the recession has shown that individuals will delay expensive, non-necessary surgeries. Finally, the Obamacare health reform plan imposes a 2.3% tax on thousands of medical devices starting in 2013. Many analysts fear that this will cause the sector to be "dead money". However, no matter what healthcare reform may bring, the long-term profit for these firms is still there as we live longer. These temporary "hiccups" might just be the perfect buying opportunities for investors.
Adding Those Artificial Hips
Positions in the iShares Dow Jones US Healthcare (NYSE:IYH) or the SPDR S&P Pharmaceuticals (NYSE:XPH) are good starting points for investors looking towards healthcare. Investors can bank directly on the medical device makers through the iShares Dow Jones US Medical Devices (NYSE:IHI). The exchange traded fund follows 40 of the largest manufacturers including heart specialist Medtronic (NYSE:MDT) and knee replacement firm Stryker (NYSE:SYK). The fund is up nearly 21% over the course of the year and charges a cheap 0.47% in expenses.
As the recession has taken the wind out of the sails of high price and elective therapies, investors may find solace in those device companies that manufacture the boring stuff. More than quarter of CR Bard's (NYSE:BCR) nearly $2.5 billion in revenue stems from urology products such as catheters. While a hospital may be willing to forgo that shiny new open MRI machine, these products are necessities. As are disposable syringes, which is Becton-Dickinson's (NYSE:BDX) forte. These hum-drum suppliers offer a low tech way to play the high tech world of medical supplies.
Finally, the world of dentistry is becoming equally as high-tech as heart surgery. DENTSPLY International (Nasdaq:XRAY) produces low tech sealants, impression materials, tooth whiteners and topical fluoride as well has dental prosthetics, hand held polishers and other dentist equipment.
While Obamacare and the recession have thrown healthcare for a loop, the long term outlook is rosy. The general world population is growing and aging. New advances in medical devices will not only help patients live better lives, but power portfolios as well. Companies such as St. Jude Medical (NYSE:STJ) and the rest of the medical device sector offer a compelling buy at these levels. Investors with long enough timelines should consider adding a percentage of their portfolios towards them. (To learn more, see Investing In The Healthcare Sector.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!