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Health Care Investing: Schwab's Rx

"Health care" is two words, and the health care sector is increasingly being viewed as two very different sectors: pharmaceuticals and managed care, which are in trouble; and medical devices and services, which are not.

Paul Alan Davis of Charles Schwab Investment Management runs a four-star fund that's up an average of 16.5 percent per year over the last five years.

He says he's been trying to position the fund to benefit from three health-care trends: politics, medical-cost containment, and the loss of patents on blockbuster drugs.

Recommendations:

His first pick is Baxter International.

"Baxter International is a services and medical equipment provider in the plasma and kidney area," he told CNBC. "[It's] one of those firms that's spinning off significant cash flow, and looks like it's a safe bet environment."

Davis also likes a more growth-oriented company, Thermo Fisher Scientific.

"They provide a lot of the equipment that is used in testing of drugs," he said. "They've had a really good growth rate -- 15 percent projected in the future -- and...a company that's spinning off $1.3 billion in free cash flow."

  • Learn more: Watch the entire Davis interview (2 mins, 3 secs)

Disclosure:

Davis owns shares of Baxter International and Thermo Fisher Scientific through his fund.

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