Outlook for Healthcare Is Optimistic

Includes: IHF, IHI, IXJ, STJ
by: Jim Farrish

Are healthcare stocks getting stronger, or just getting a lift from a positive market trend? Many have focused on the 2010 elections changing control in Congress and the potential repeal, or at least changes, to the healthcare reform bill. Much of the rhetoric only creates temporary moves in the sector and the stocks. The case for investing in healthcare takes time to research the potential developments and opportunities.

The assumption from most analysts is that 2011 promises to be more of the same. The FDA will maintain its restrictive hold on the production of new drugs and services, thus limiting the expansion of the pharmaceutical sector. Pressure on Medicare and insurance reimbursement payments will remain and could get even tougher with the new regulations. Under current economic conditions, the expansion of elective services isn’t likely to expand. The providers are likely to exert even greater push-back to insurance companies and government controls. All said, sounds like a great environment for investing.

Uncertainty is one of, if not the biggest, deterents to money staying in stocks. If analysts and investors can’t foresee reasonable and predictable outcomes, they tend to look elsewhere for opportunities. This will put pressure on the sector, as well as increased volatility. As with any investment opportunity, you have to measure the risk taken versus your risk tolerance. Taking on more risk than you can withstand ends in a negative result.

Scanning the landscape, two of the industry groups within the healthcare sector which look attractive are the Providers (NYSEARCA:IHF) and the Medical Devices (NYSEARCA:IHI). Both are worth exploring for opportunities within the sectors or through the ETFs themselves as a diversified approach to putting money to work.

The iShares DJUS Healthcare Providers Index ETF (IHF) has been in a solid uptrend since September. The opportunity of the healthcare reform bill was put to this sector. Adding millions of uninsured individuals to the roles increases their potential revenue. Assuming they can maintain profitability under the reimbursement guidelines, the sector will continue to see top and bottom line growth. They will continue to put pressure on both the insurance companies as well as the government to maintain profitability. There are 37 stocks in the ETF and they are worth scanning to define the leaders and the opportunities looking forward. The uptrend is in play and unless there are some significant changes on the horizon, the trend should continue.

The iShares DJ US Medical Devices Index ETF (IHI) is in a similar uptrend, but has experienced more volatility as a result of the increased tax on new sales of equipment. The demand in the US for new equipment could slow initially as a result of the tax and budget cuts, but the outlook remains promising. As with the providers, scanning the ETF for the leaders is recommended. There are 27 stocks in the fund to review for opportunities. St. Jude Medical (NYSE:STJ) is one of the attractive stocks in the iShares DJ US Medical Devices Index ETF.

What about the global picture? It stands to reason that as emerging markets develop, the demand for quality healthcare increases. This brings demand for new hospitals and equipment to provide the needed and desired care for the populous. Thus, one area of optimism is in global healthcare stocks. iShares S&P Global Healthcare Index ETF (NYSEARCA:IXJ) offers one way to take advantage of this opportunity. The fund has 82 stocks around the globe. The one area of concern is the over-weighting in the pharmaceutical and biotech sectors accounting for 77.4% of the fund. The global outlook for these sectors is better, but you still need to give them consideration given the allocation in those stocks to the US markets. Scanning the individual stocks gives you options as well.

The outlook for the healthcare sector is optimistic. The volatility factor in the sector will increase if the political landscape takes on the task of reforming the current bill. But, one thing is certain, with an aging population in the US, the demand for care will not decline any time soon. Do your homework and find the opportunities that fit your risk profile before you put your money to work.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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