Prescribing Healthcare Stocks For Your Portfolio

By Aaron Levitt | January 14, 2011 AAA

With the passage of the landmark Obamacare bill in 2010, the healthcare sector was one of the weakest performers throughout the year. The broad-based Health Care SPDR (NYSE:XLV) only showed modest gains as the sector grappled with the conditions of the legislation. In addition, companies within the sector had to deal with various external financial pressures. 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 or treatments. However, the long term trends are bullish for healthcare. Now may be the time for investors to consider the sector.

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Both Short and Long Term Catalysts
The new elected Republican controlled house is bullish for the sector. While outright repeal of the healthcare bill seems doubtful, compromise and amendments to the legislation seems likely. The various taxes and fees written in already do have a chance to be reduced. These various fees are currently causing profitability and pricing drag on shares of healthcare related companies.

Longer term, healthcare remains a compelling portfolio addition. In 1980, Americans spent about $253 billion on healthcare. Within ten years that number grew to about $714 billion. In the late half of this decade, that number ballooned to $2.3 trillion, accounting for over 16% of the United State's GDP. While the pace of spending has slowed in recent years, Medicare and private health spending annual growth rates still eclipses overall inflation and national income growth rates. There are currently more than 70 million baby boomers hitting retirement age over the next few years and many analysts estimate that caring for this growing population has raised costs. This will continue as the baby boomers will begin qualifying for Medicare this year and many of the costs are shifted to the public sector. Our aging population, higher obesity rates and chronic medical conditions will keep demand for medicine and healthcare soaring.

In addition, demand for quality healthcare solutions will increase as the newly emerging middle class in nations like China grow and develop. By 2012, India's healthcare sector is projected to grow to nearly $40 billion. These international opportunities represent the real future of the healthcare sector. Global spending on drugs, therapies and other treatments is estimated to see rapid growth throughout the emerging markets.

Playing That Growth
As healthcare will remain a top priority for the future, investors with longer term timelines can use the recent weakness in the sector to add positions in health related companies. An over-arching fund like the iShares Dow Jones US Healthcare (NYSE:IYH) can offer easy access to the sector. However, there are other opportunities as well.

Swiss drug maker Novartis AG (NYSE:NVS) might be worth a portfolio addition. Focusing on more conservative endeavors such as generic drugs and consumer health products, the company has used this cash flow to help pay for its $50 billion acquisition of eye care giant Alcon. The company is on track to be debt free within four years, which could lead to dividend increases or other strategic acquisitions. Shares of the drug maker currently yield 2.9%.

One of the worst complications caused by changes in diet has been an increase in the number of people suffering from diabetes. The World Health Organization research shows that more than 1 billion adults are overweight and India is projected to have 73.5 million diabetes cases by the end of 2025. Despite new advances in therapies, insulin still remains the best option for many. Novo Nordisk (NYSE:NVO) became one of the first manufacturers of insulin in 1923 and currently supplies almost half of the world's dosage.

Finally, some of the biggest advances in the health industry will come from technological innovation. Both biotech drugs and medical devices are catalysts that will drive market growth. Both the iShares Dow Jones US Medical Devices (NYSE:IHI) and SPDR S&P Biotech (NYSE:XBI) track companies in these fields, such as Boston Scientific Corporation (NYSE:BSX). These ETFs can provide the one-two punch portfolios need in healthcare.

Bottom Line
Despite the recent bad year, healthcare stocks remain a great long term opportunity. Changing global demographics and rising costs bode well for the sector. Investors can use the recent weakness caused by the hangover from the Obamacare bill to add funds such as PowerShares Dynamic Pharmaceuticals (NYSE:PJP) to a portfolio for long term gains.

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