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Tickers in this Article: PFE, XLV, FXH, IHE, TEVA, CEPH, RDY, HCP, WPI, HCN, NHI, XBI
With the markets continuing their meteoric rise over the last few months, there are very few sectors that would be considered bargains at this point. However, with long-term population trends firmly in hand, the need for greater healthcare solutions is almost assured. Pfizer's (NYSE:PFE) recent earnings flap has sent many broad healthcare measures downwards. This could be a perfect opportunity to add the healthcare sector to a portfolio. (For more, see Investing In The Healthcare Sector.)

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A Great Long-Term Bet
The healthcare sector continues to remain a compelling portfolio addition. In 1980, Americans spent about $253 billion on healthcare related expenses. Within 10 years, U.S. citizens spent about $714 billion. In the late half of this decade, that number ballooned to $2.4 trillion, accounting for over 16% of the United States' GDP. Total dollars spent on medications alone reached nearly $308 billion in 2010. That's about $898 per person. These spending amounts by both Medicare and the private sector have eclipsed overall inflation and national income growth rates.

Long-term global demographics are also in healthcare's favor. In Japan, nearly 25% of the total population in 2011 is age 65 and older. By 2050, analysts expect nearly 40% of the nation's population to be in this group. In the United States, reports by AARP have shown similar results. More than 70 million individuals will be Medicare beneficiaries over the next two decades. The story is the same throughout developed Europe as well: significantly older populations requiring more care. (To learn more about our aging population, see Demographic Trends And The Implications For Investment.)

In the emerging world, the opposite is true. Faster-growing populations in places like Indonesia will require more healthcare solutions to prevent wide-spread epidemics. India's healthcare sector is projected to grow to nearly $40 billion by 2012. New drugs and therapies will be demanded by the ever-growing middle classes of these nations. The World Health Organization estimates that, as these low- to middle-income countries age over the next 25 years, they will see higher levels of cancer and heart disease.

In the short run, now may be the time for investors to pounce on the sector. Stocks within the healthcare space trade at 30-40% discounts to the overall market, with dividend yields two- to three-times higher. The broad Health Care Select Sector SPDR (NYSE:XLV) trades at a current P/E of just 13, compared with the broad markets P/E of 15. In addition, the new elected Republican controlled house is bullish for the sector. Outright repeal of the healthcare bill is most likely not in the cards, but compromise and amendments to the legislation seems likely. (For more on how ETFs can help your portfolio, check out 4 Ways To Use ETFs In Your Portfolio.)

A Portfolio HMO
With the long-term picture for the sector looking good, investors may want to use the current weakness, due to Pfizer's recent earnings miss to add healthcare to a portfolio. Funds like the First Trust Health Care AlphaDEX (NYSE:FXH) or iShares Dow Jones US Pharmaceuticals (NYSE:IHE) make adding large swaths of the sector easy. However, there are plenty of individual sectors and stocks that will benefit from the trends in healthcare.

Generic drugs now account for 78% of all prescriptions dispensed and more than 80% of a brand name's prescription volume is replaced by generics within six months of patent loss. Israel's Teva Pharmaceuticals (Nasdaq:TEVA) is often the go-to name in generic drugs, but with the company's recent purchase of Cephalon (Nasdaq:CEPH), it continues to move towards more branded biotech drug exposure. However, this may not be a bad thing. For investors looking for "pure" generic exposure, both Dr. Reddy's Laboratories (NYSE:RDY) and Watson Pharmaceuticals (NYSE:WPI) may be better choices.

One of the side plays on the healthcare sector is in that of medical real estate. Newer hospitals and doctor's offices for practicing medicine as well as assisted living centers for aging retirees will need to be owned and operated. REITs like HCP (NYSE:HCP), Health Care REIT (NYSE:HCN) and National Health Investors (NYSE:NHI) all offer 4.5% plus dividends.

The Bottom Line
As one of the few sectors that remain a bargain, healthcare should be on investor's radar. The long-term picture is rosy, and investors can use the recent weakness to add the segment to a portfolio. The previous stocks as well as funds like the SPDR S&P Biotech (NYSE:XBI) make great portfolio additions. (For more on the healthcare industry, check out Healthcare Funds: Give Your Portfolio A Booster Shot.)

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