The health care sector is expanding as more individuals obtain health insurance yet the investment opportunitiesare shrinking — in market cap.
Expected government cuts to Medicare and Medicaid, the uncertainty of health care reform and looming patent expirations are weighing heavily on the outlook of the biggest companies in the sector: large-cap pharmaceutical stocks.
“Despite how cheap they look, you want to avoid a sector close to a patent cliff,’’ says Derek Taner, manager of the Invesco Global Health Care Fund , who has been underweight large drug makers for the last eight years.
But big pharma isn’t reflective of the overall sector, says Taner, “The rest of health care really isn’t that expensive, there is lot of opportunity elsewhere.’’
Invesco Global Health Care is finding opportunities among mid-cap and small cap companies where one to three key products are driving performance. Their size makes them easier to follow and their above-average growth rates make them attractive acquisition targets in a consolidating industry.
Taner tends to buy these stocks at a discount following negative news. Being a value manager in a traditional growth sector enables the fund to buy promising stocks earlier than growth managers, who tend to buy after earnings have rebounded.
Teva Pharmaceuticals is one such value play. Shares are down 20 percent over the last 12 months but Taner says the generic drug maker is well positioned long-term. Teva also markets Copaxone for multiple sclerosis and is a savvy acquirer that is expected to generate mid single-digit EPS growth going forward.
Another opportunistic holding is CareFusion , part of a medical devices group that Taner considers inexpensive but susceptible to slowing growth rates. The company’s operating margins currently lag its competitors but Taner expects improvement over the next two to five years.