These 3 hot health-care stocks look strong: Pro

New tax guidelines; Pain for stocks?
New tax guidelines; Pain for stocks?   

The strong-performing health-care sector is still only in the early innings of a continued bull market, Dan Chai of Iguana Healthcare Partners said Wednesday.

Both the S&P Health Care Select Sector Index and the Health Care Select Sector SPDR exchange-traded fund are up year-to-date by 18.4 percent and 17.5 percent, respectively. By comparison, the S&P 500 gained 7.8 percent in the same time frame.

On CNBC's "Halftime Report," Chai said that there had been a misperception this year that biotech stocks were in a bubble.

"So, large-cap biotechs have done well this year," he said. "We went back and actually analyzed what's driven that outperformance. Interestingly, the majority of the outperformance has been driven by new-product introductions and earnings upside because of leverage down to P&L.

"The multiple has actually contracted, which I think is kind of counterintuitive to what the public believes."

Read More3 top biotech stocks with big upside: Pro

Over the next year or two, the large-cap biotech sector is likely to see "robust data flow, new clinical data announcements, continued momentum in terms of the blockbuster product launches and the P&L leverage to drive earnings," Chai added.

"And in a way, we can envision a scenario where now sentiment, which we define as sort of the multiple, can catch up to fundamentals."

Chai said that his top three health-care stock picks are: Medtronic, which should do well regardless of how its proposed tax-inversion deal with Covidien turns out; pharmaceutical company Sanofi, and Tornier, a medical-device manufacturer that should benefit from a variety of factors, including recent restructuring and potential consolidation.