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Health Care Stocks: Schwab's Rx

Health care is a sector that seems guaranteed to grow, as America's population ages, but shares of many health-care companies have been hit hard this year.

Still, Schwab portfolio manager Paul Alan Davis says there are some promising opportunities for investors.

His four-star Schwab Health Care Fund is up an average of 12.5 percent per year over the last five years.

Recommendations:

His first pick is pharmacy benefits manager Express Scripts.

"Express Scripts is in a space...that has been kind of part of the solution," he explained to CNBC. "They're helping firms and organizations lower their overall medical costs."

He finds the company's long-term contracts offset the risk that client firms will be scaling back on their benefits programs.

Davis also likes Baxter International.

"This is a company we like because of its international diversification and its product diversification," he said. "They're repurchasing shares; their free cash flow is better than a lot of their peers; and...the international sales has been a buffer for them on the downside."

Health-care businesses can be vulnerable to litigation, and Baxter is no exception.

"They did have a recall of some heparin," he said. "It was a voluntary recall, and heparin is a very, very small part of their business."

Disclosures:

Davis owns shares of Express Scripts and Baxter International through his fund.

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