One of the most talked demographic opportunities that I hear people discuss regarding investing is the aging population and retiring baby-boomer era. There is little doubt that the push of the aging population will create current and future opportunities in the healthcare sector and elsewhere. It’s important to remember that there are great healthcare companies, good healthcare companies and bad ones. No more evident is this than when you begin looking at specific mutual funds targeting this sector.
The common comment I’ve heard in the past is that these health stocks have gone “no where” with reference to individuals buying the mutual funds representing the sector. The problem is – the majority of the quality health stocks pay generous dividends and have enjoyed moderate growth over 5 & 10-year periods.
The problem is not with the specific stocks, but the funds that many investors buy which suffer from over-diversification – that is they hold an equal amount of poor companies and good companies that equal out returns to par or sub-par performance. When you look at the top holdings, they usually resemble stocks you expect to be held in such a fund. Yet their holdings as a percentage are lower than the average fund, fees are higher and anywhere from 25-30% of the fund may be invested into high-risk/crap biotech that is highly speculative and volatile at best.
When looking at individual healthcare stocks there are a few things you want to look for:
– Companies with strong business ties/alliances to healthcare companies
– Top-notch R&D: promising clinical trials, drugs in development
– History of stable or increasing dividends
– Company on sale: lawsuit, challenged patent, missed earnings on one-time charges
– Sound fundamentals that reflect the industry
– Competitive advantage (although many never hold a sustainable advantage)
– Stable portfolio of products in various stages of the product life cycle
– Information received through work environment
– An understanding of FDA process of clinical trials & how to read reports detailing each stage
Of course, I sit in a unique situation of having abundant access to information on these companies because of my career. I’m exposed to products, sales reps, & R&D/clinical trials involving a variety of treatments. Even looking for opportunities through private healthcare companies by way of buying supplier companies indirectly may offer excellent diversification.
