For most investors, maintaining a diversified portfolio is a good way to help minimize risk while also making sure they don't miss out on winning sectors.
Diversification can mean many things -- small versus large stocks, dividends versus growth stocks, and so on -- but most often it's taken to mean spreading your bets among a variety of industries. Of course just because you want to have some exposure to a variety of industries doesn't mean you want to have the same amount of exposure to all industries.
What about the health-care sector? Should we be digging in or pulling back right now? Let's take a look.
Performance
Here's a look at how performance has broken down among the S&P 500 industries:
|
Sector |
Month-to-Date Performance |
Quarter-to-Date Performance |
Year-to-Date Performance |
|---|---|---|---|
|
Industrials |
(2.7%) |
1.3% |
13.9% |
|
Consumer discretionary |
(2.7%) |
3.1% |
13.5% |
|
Financials |
(1.4%) |
(0.1%) |
10.7% |
|
S&P 500 Overall |
(2.3%) |
(0.8%) |
4.0% |
|
Consumer staples |
(0.3%) |
(1.8%) |
3.1% |
|
Information technology |
(3.1%) |
(1.3%) |
0.3% |
|
Energy |
(4.2%) |
0.0% |
0.1% |
|
Materials |
(4.1%) |
(3.7%) |
(1.4%) |
|
Health care |
(1.3%) |
(5.1%) |
(2.4%) |
|
Utilities |
(1.6%) |
0.8% |
(3.9%) |
|
Telecom services |
(1.4%) |
(2.8%) |
(8.3%) |
Source: Standard & Poor's as of May 10.
Now that politicians have approved health-care reform, the hubbub over the sector seems to be a distant memory. It's my belief that some of the best investment opportunities can be found in quiet sectors that nobody is watching. Is that the case with health care?
Let's take a closer look
Here's a peek under the hood of some major U.S. health-care stocks.
|
Company |
Market Cap |
Subsector |
Trailing Return on Equity |
Forward Price-to-Earnings Ratio |
|---|---|---|---|---|
|
Johnson & Johnson |
$178 billion |
Pharmaceuticals |
28.2% |
13.3 |
|
Pfizer |
$137 billion |
Pharmaceuticals |
10.5% |
7.8 |
|
Merck |
$104 billion |
Pharmaceuticals |
30.4% |
9.8 |
|
Abbott Laboratories |
$76 billion |
Pharmaceuticals |
27.4% |
11.9 |
|
Amgen |
$54 billion |
Biotechnology |
22.5% |
10.9 |
Source: Capital IQ, a Standard & Poor's company.
It's pretty easy to see from this chart that the big money in health care is in pharmaceuticals. But that subsector is a bit of a double-edged sword at the moment.
Most of these companies -- Pfizer and Merck in particular -- sport very healthy dividend yields and tantalizingly low valuation multiples. But this isn't because investors have managed to overlook these $100 billion behemoths. Rather, it's because investors are concerned about major patent expirations.
Pfizer, for instance, will see the patent protection afforded both Lipitor and Aricept expire in 2010, representing $11.4 billion and $432 million, respectively, in 2009 revenue. For Merck, patents on Cozaar and Hyzaar bite the dust; those two drugs represented a combined $3.6 billion in revenue.
While J&J and Abbott are far from immune to painful patent expirations, both companies have more diversified businesses, giving them cushions against knocks to the pharma portion. J&J complements its pharma with consumer products, medical devices, and diagnostic products, while Abbott's pharma group has support from diagnostic, nutritional, and vascular products.
While many of the largest health-care companies sprout from pharma soil, there's a lot more to the sector than just drugs. There are cutting-edge treatments coming from biotechnology companies like Amgen and Gilead Sciences
And, finally, we can't forget about the companies linking consumers and the health-care products they need: insurance providers like UnitedHealth Group
Putting it all together
If you want to be equal-weight in the health-care sector right now, you'd have to have just over 11% of your portfolio invested in health-care stocks. But I think investors would do well to tip their portfolio in the direction of being overweight health care.
The market has had quite a surge over the past year or so, and investors have largely flocked to stocks in areas like finance and industrials that tend to lead the charge in a rebound. Meanwhile, the health-care sector has been left in the dust. That has not only meant lackluster year-to-date returns, but has also allowed the group to fall to the second-lowest trailing P/E among all the S&P sectors (only utilities are cheaper).
The sector isn't without its risks -- as noted above with the pharma players -- but there seem to be a lot of great opportunities, particularly if you like dependable blue chips.
What do you think? Are you bullish or bearish on health care? Scroll down to the comments section and share your thoughts.
You don't need technical analysis to figure out the health-care sector. Besides, technical analysis is stupid.
