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.

Bottom Line
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!

Related Articles
  1. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  2. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  3. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  9. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  10. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!