Playing Healthcare Safely With These 6 Stocks

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 |  Includes: ABT, BSX, MDT, MRK, PFE, VHT
by: Richard Saintvilus

A lot has been made about the Obama-care legislation and its potential effect on the healthcare sector as a whole. But astute investors looking for "healthy returns" are already aware that there are very few sectors as safe as healthcare - particularly in volatile markets where safety become a priority. As much as it seems the bulls are in control of the indices these days, more evidence continues to support the idea that the market has long been in overbought territory and is due for a reversal, if not a slight pause.

Aside from utilities and consumer staples, healthcare has consistently proven to be the safety net of safety nets for portfolios looking to navigate through periods of volatility and uncertainty. Because, regardless of how the economy is doing, people still catch colds, car accidents still occur as well as the occasional fishing trip accident. The sector remains an interesting buy even at current levels and furthermore, there are a variety of factors that could help boost shares of specific firms within the sector.

Healthcare on the rise

Merck (MRK) and Pfizer (PFE)

Merck and Pfizer are interesting considerations here, because, aside from the fact that they both pay a respectable dividend, both stocks are sitting at 52-week highs. To me this has always been a sign to wait for the pullback. But with this being a new year and all, I've gotten a new perspective and, as I've said previously, I'm putting behind some old myths. Having said that, it remains hard to assess where either company is and where either might be going. Despite the positives in the stock, there are some concerns of both companies that are legitimate; some of which has had to do with limited R&D pipelines. But despite all of that, I continue to believe that over the long term there will be some value in both stocks.

As big-cap drugs have been laggards for several years, investors have plenty of choice in the space. Much of what can be said about Merck can also apply to Pfizer and vice versa. However, Merck in particular offers a solid dividend payout and a relatively stable, if not exciting, business outlook. While drug companies for the most part have spent many years trying to regain investor trust, it may be time to reevaluate them and appreciate them for the cash flow they do still offer.

Abbott Labs (ABT)

Abbott Labs is one of those names that I can't seem to avoid. It is a solid company with excellent fundamentals, but I think it is a tad overpriced at current levels. The company obtains a great portion of its profits from pharmaceuticals. Nevertheless, this is a company with excellent long-term growth characteristics and compelling drivers for future growth. The company's new stent platform is capturing share from the rest of its peers, and I believe many investors under-appreciate the quality and growth potential of Abbott's diagnostics franchise. With a solid long-term record of cash flow growth, a good return on capital, no major patent issues and manageable debt, I believe dividend-seeking investors stand to benefit a great deal from the standpoint of excellent income and tremendous growth.

Abbott recently announced plans to split into two separate public companies, with one focused on pharmaceuticals and the other on medical products. Abbott plans a tax-free distribution of shares of the pharmaceutical company to existing shareholders by the end of 2012. The businesses that are staying with Abbott are projected to have approximately $22 billion in revenue in 2011. These include medical devices, nutritionals for both children and adults, diagnostic products and generic pharmaceuticals sold outside the United States. The company is targeting double-digit annual earnings growth once the separation is complete. For long term investors this is a great play.

Boston Scientific (BSX)

One of the best turnaround stories in the healthcare sector continues to be that of Boston Scientific. The company is one of the leading producers of medical devices that are used in a range of interventional medical specialties. Its main challenge centers on trying to secure better and decent footing in the drug-coated stent market vacated by Johnson & Johnson (NYSE:JNJ). Many analysts became optimistic about the company when Johnson & Johnson conceded the market, but Boston Scientific has been unable to prove that it can win in the market. The company needs to show that it can execute and reduce some expenses.

Other considerations

Another way to gain exposure within the sector is to via an ETF such as the Vanguard Health Care ETF (NYSEARCA:VHT). This is one of the better and affordable options for wide-ranging access to a number of healthcare stocks within one. The fund tracks 307 different firms including some of the names mentioned above such as Pfizer as well as Johnson & Johnson. Some of the sector's equipment maker's earnings have been reinforced due to share buybacks and there is evidence that more are on the way. It is always an encouraging sign for management to show the level of confidence that a buyback often suggests.

In that regard, one of the names to consider includes Covidien (COV) as well as Medtronic (NYSE:MDT). With the latter having a mix of businesses that have less exposure to Medicare cuts than rivals such as the aforementioned Boston Scientific and is less expensive by virtue of its P/E ratio of 12 compare to 21 of Boston Scientific.

Summary

Regulation and other political concerns continue to place the spotlight on the healthcare sector. But that does not necessarily mean it has adversely impacted any of the firms. As discussed above, there are some gems out there if one cares to look. Healthcare has always been safe and will continue to be. Eventually, regulation will be finalized and the companies will go back to the business of getting people well and getting investors rich, well at least a little.

Disclosure: I am long MRK, PFE.