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Fears over regulatory changes are masking opportunities in the health-care sector.

WHENEVER AN INDUSTRY FACES major change–be it new regulations, technological advances, or a shift in the competitive landscape–investors tend to sell first and ask questions later. That has certainly been the case in health care lately, as debate in Washington over the best way to rein in costs (is it a government-run health plan or insurance cooperatives?) has kept the sector from joining in on the recent rally. So I decided to look around for stocks that have been passed over because of reform fears but that are likely to thrive no matter what solution is ultimately chosen.

Given all the uncertainties, I thought it best to look for firms that stand to benefit from the general move to more cost-effective care as well as the rising volume of care (if costs fall and more Americans are covered, usage will grow). But I also wanted firms that would be insulated from potential changes in reimbursement policies.

While some obvious choices–such as generic-drug makers and healthcare IT firms–aren’t trading at attractive prices now, the three stocks below all appear to be good values.

McKESSON (MCK; P/E ratio: 10.1)

There are several reasons to like this leading distributor of drugs, surgical supplies, and health-care products. The pharmaceutical distribution business is an oligopoly, with only three major national players and high barriers to entry.

McKesson also has a technology services unit that’s growing nicely and that fits into the Obama administration’s theme of improving efficiency. Hospitals, for instance, use McKesson software to monitor medication administration and to organize clinical data. But unlike shares of pure IT firms, this stock is cheap, trading at only 10 times earnings.

QUEST DIAGNOSTICS (DGX; P/E: 13.3)

Any shift in health-care spending toward prevention–which is almost always cheaper than treatment–is likely to boost demand for clinical testing services. And that would benefit Quest, a leading diagnostic firm that provides outsourced lab services for everything from routine blood tests to HIV drug cocktails. The company is also making a push into more complex gene-based testing, which should improve its profit margins.

GENZYME (GENZ; P/E: 11.5)

This biotech firm, which specializes in treating rare diseases, has been in the news recently thanks to a manufacturing problem that temporarily halted production at one of its facilities. And you might think that a company selling treatments that can cost hundreds of thousands of dollars a year would be an easy target for reformers.

But Genzyme’s therapies tend to serve small patient populations who have few (if any) alternatives. And its biologic drugs don’t currently have generic counterparts. The clincher: This top-tier biotech trades for less than 12 times earnings, about half its long-term growth rate.

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This entry was posted on Monday, July 27th, 2009 at 4:39 pm and is filed under Dental Care & Health Care. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.