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.


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."


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