The Best Drug Stock for 2007

All investors should consider owning a drug stock or two for their portfolios. Health care is just too important a growth industry to be ignored.

If you fancy dominant large caps, the major players in pharmaceuticals can be very compelling investments when the price is right. These companies are in a great position to capitalize upon the aging baby boomer population, which is a very favorable demographic tailwind for drug companies. The Centers for Medicare and Medicaid Services project high single-digit growth in health care spending for the next decade.

With the big pharmas you don't have to worry about today's leader being gone tomorrow. The barriers to entry are just too high. Strong patent protection and massive R&D investments work in favor of keeping the best companies at the top of the field.

And for all you dividend lovers out there, consider that the major pharmaceutical companies have very attractive yields right now. Stalwarts like Pfizer (NYSE:PFE), GlaxoSmithKline (NYSE:GSK), and Merck (NYSE:MRK) are all yielding over 3%. Buying shares of these sector leaders when the prices are favorable and reinvesting the dividends is a very sound strategy that should beat the market over the long haul.

The drug industry also has some very nimble small caps that are on the cutting edge of scientific breakthroughs -- companies like Alnylam (NASDAQ:ALNY) and Exelixis (NASDAQ:EXEL). Yes, these relatively tiny biotechs can, and do, blow up on investors, but when carefully selected they can add a lot of juice to your returns. They are not for the faint of heart, though, so if you don't like a lot of volatility, stick with the major pharmaceuticals.

Diversifying your health-care investments across the small and large caps is a good strategy, in my opinion. Our healthcare writers have identified six drug companies for your consideration and they lay out their case for each of them. If you agree with the analysis, rate the stock "outperform" in Motley Fool CAPS. If you disagree, rate the stock "underperform."

The drug stock with the most new, net outperform ratings (outperform ratings minus underperform ratings) will win the contest.

By early next week, our powerful community of investors will have declared the best drug stock for 2007. Get started by reading the analyses below and then clicking here to join CAPS today.

Our contestants:

• Momenta Pharmaceuticals
• Pfizer
• GlaxoSmithKline
• Forest Laboratories
• Genentech
• Endo Pharmaceuticals Holdings

Pfizer is an Inside Value recommendation. GlaxoSmithKline is an Income Investor selection, and Merck is a former recommendation of that newsletter. Exelixis and Momenta are Rule Breakers picks.

Fool health-care editor and biotech analyst Charly Travers owns shares of Exelixis. The Fool has a disclosure policy.