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Does it make cents to invest in health care?

by Tom Gray
August 27, 1998
Illustration by Malcolm Garris/PhotoDisc

You work in health care. You know a thing or two about the business. Is it time to put that knowledge to work on Wall Street and buy some healthcare stocks?

How you answer that question depends on many factors, some economic and some emotional. Not everyone should be jumping with both feet into the stock market. But for all the political controversies and crisis talk that seems to swirl constantly around health care these days, experts say this industry has plenty of opportunities for patient investors.

One thing is for sure. The healthcare business isn’t about to fade away. If anything, it seems headed for a new surge of growth as the Baby Boom generation ages and enters its prime healthcare consuming years.

Ups and downs

Health care has an added virtue when the stock market looks a little shaky, as some say it does now. Compared to other businesses, it’s relatively immune from economic ups and downs. Consumers may put off buying new cars if the economy slows down. But "will they stop going to the doctor? No," said John Garrity, a senior vice president with the New York-based brokerage Stuart, Coleman & Company Inc. "Will they stop taking the necessary medications? No."

But not every company in the vast healthcare industry (which makes up one-seventh of the U.S. economy) faces the same bright future. For some, the outlook ranges from merely cloudy to downright grim. And the investment record of various healthcare sectors has been decidedly mixed. (See "Charting a Course.")

If you’d bought stock four year ago in some of the big pharmaceutical firms—such as Merck & Co., Pfizer, or Schering-Plough—you’d be sitting pretty now, with gains well above those of the overall stock market. Hospitals would have been good bets as well, even with the crackup of the nation’s largest for-profit chain, Columbia/HCA Healthcare Corp.

But if you think making money in health care is a snap, look at the unhappy returns of managed care, home health, and physician-practice management.

Be your own expert

Of course, some of today’s dogs were once stock market darlings, such as Oxford Health Plans and FPA Medical Management. If so many investment professionals can be fooled, does the small investor have a chance? Some say yes. In fact, said famed money manager Peter Lynch, the lack of Wall Street connections may even give you an edge. You may be less inclined to follow the herd and more inclined to act on what you actually know rather than what you hear from Wall Street buzz.

Lynch became a stock market legend as an investment pro, managing the spectacularly successful Fidelity Magellan Fund in the ’70s and ’80s. But he thought like an amateur, he said. He looked for the stock stories (like hot new products) that the Street hadn’t discovered, and he said anyone can do the same.

In his 1989 book, One Up on Wall Street, Lynch advises investors to look for stocks with the potential for tremendous growth close to home "and especially wherever you happen to work." This is especially true in health care, Garrity said. "If you’re in the medical field, you have a tremendous advantage," he said, because most of the investing public knows so little about it. The success of a retailer like Wal-Mart may be obvious to the millions of consumers that jam its stores. But healthcare professionals may be in a unique position that lets them spot the next blockbuster drug or new medical technology.

Strong foundations

It takes more than a hot new product to make a good stock investment. The company behind the product needs to be sound and profitable, with a good jump on the competition. Buying stock directly (even buying your employer’s stock) involves risk and demands research, and not everyone has the time and temperament for it. No investment should rob you of sleep. If it’s doing that, financial advisers say, sell it.

For those who want to leave the stock-picking to someone else, there are several mutual funds that allow you to invest in a pool of healthcare stocks. Two of them, Fidelity Select Health Care and Vanguard Specialized Health Care, have track records strong enough to earn the highest (five-star) ranking from the Morningstar fund rating service.

Most mutual funds, these included, aren’t in the business of making moral distinctions among companies. And among the groups that rate stocks on a social responsibility scale, healthcare firms tend to do pretty well. Their product, after all, is healing. Certain drug and medical-product firms such as Merck and Johnson & Johnson show up often on "preferred" lists because of their altruistic corporate cultures and their reputations for humane workplace policies. As for more controversial players such as Columbia, the investor has a choice between sharing in the company’s success or registering disapproval by opting out.

Sometimes a company makes that choice easier when it gets too aggressive for its own good and gets tripped up by the law and the market. In recent years, the more saintly healthcare stocks (everything’s relative, of course) have been mostly good investments. If this trend continues, you can avoid some moral dilemmas and still make money. That’s a good place to be.

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