Ruling Or Not, Healthcare Still Wins

By Aaron Levitt | March 27, 2012 AAA

Over the last two years, the healthcare sector has been about one thing: The Affordable Care Act. The landmark legislation promises sweeping change across the sector including the highly debated individual health insurance mandate. To that end, healthcare stocks have seen their share prices languish in the face of the bill's uncertainty. This week, some of that uncertainty could be gone. The U.S. Supreme Court will begin hearing three days of oral arguments on the constitutionality of Obamacare. While it's expected that the bill will pass, that may not matter. For investors, the long-term picture for the healthcare sector is rosy and all of this uncertainty is making for a great buying opportunity.

SEE: Countries With The Highest Healthcare Spending

Ignore the Noise
With much protest and fervor, Obamacare goes to the Supreme Court this week for three days' worth of debate. While the nation's top court won't announce a ruling until late June, the Affordable Care Act has overall been a modest net negative for the earnings of most healthcare related firms. While there is no guarantee that the law will be upheld, many analysts expect the sweeping legislation will pass.

However, the passage of the bill may be a moot point. Long term global demographics are in the sectors favor. In the United States, more than 70 million individuals will be Medicare beneficiaries over the next two decades. That equates to roughly 10,000 baby boomers a day turning 65 years-old, every day for the next 20 years. Similar demographic trends are underway in both developed Europe and Asia. As our population ages, more and better healthcare solutions will be required and demanded. Already, the sector is seeing signs of demand growth. During the second and third quarters of 2011, personal healthcare expenditures have exceeded sequential gross domestic product growth.

In the emerging world, the opposite is true. Faster-growing populations in places like Indonesia will require more healthcare solutions to prevent widespread epidemics. New drugs and therapies will be demanded by the ever-growing middle classes of these nations. These factors are bullish for healthcare stocks.

Speaking of stocks within the sector, healthcare remains one of the more reasonably priced options for investors. Analysts have already included the bills effects into healthcare-related stocks' future earnings. So any negatives from Obamacare have already been priced in. According to Morningstar (Nasdaq:MORN), healthcare is the second cheapest of all major equity sectors, relative to its historical fair values.



SEE: Investing in the Healthcare Sector

Time to Pounce
Given the long-term demographic shift at hand, investors may want to overweight healthcare stocks. The continued uncertainty due to Obamacare has provided investors with a buying opportunity. Perhaps the best way to add the sector is through a broad approach.


The Health Care Select Sector SPDR (ARCA:XLV) is one the largest and most liquid funds in the sector. The ETF holds 54 different healthcare giants including Johnson & Johnson (NYSE:JNJ) and insurer UnitedHealth Group (NYSE:UNH). The fund spreads its $4 billion in assets across a variety of healthcare subsectors with pharmaceuticals accounting for 50% of holdings. Expenses for the fund run a cheap 0.18%. Likewise, the Vanguard Health Care ETF (ARCA:VHT) is another cheap/broad option. Expenses for the VHT cost only 0.19%, but investors gain access to nearly 300 stocks.

Healthcare remains a very technology oriented field, with some of the greatest advances coming from the biotech and medical device sectors. The iShares Nasdaq Biotechnology (Nasdaq:IBB) offers a broad way to bet on the high-tech side of medicine. The fund's 118 different holdings allow investors to gain from biotech's "lotto ticket" nature, while eliminating much of the single stock risk. In addition, the various scientific instrument and supply firms, like Thermo Fisher (NYSE:TMO) and Bio-Rad Laboratories (NYSE:BIO), should see increase demand for their products as drug research gets more intense and expensive.

SEE: Where Can Americans Go for Cheaper Healthcare?


The Bottom Line
The Affordable Care Act is hitting another milestone. This week it finally goes in front of Supreme Court. However, the Justice's ruling may not matter. Healthcare has long-term demographics on its side. For investors, adding the sector still makes sense. The previous broad picks, along with the First Trust Health Care AlphaDEX (ARCA:FXH), make great ways to play the beaten-down sector.


SEE: Additional Healthcare Coverage Needs For An Aging Population

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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