Health-Care Sector Relatively Stable

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Even during economic downturns, individuals need to visit doctors and hospitals and take medications.

Health stocks have long served as defensive holdings—investments that will not collapse in downturns. After all, consumers still buy drugs and visit physicians during recessions. This year some pharmaceutical stocks provided protection, avoiding big losses while almost every other industry sank deeply into the red.

But investors need to keep in mind that not all health stocks have proven resilient. Some makers of medical supplies have seen the price of their shares drop more than 20%. Many of the weaker stocks provide products and services that are used for elective surgery and other procedures that may not be necessities. Faced with the slowing economy, consumers have been cutting back on products they consider luxuries.

To avoid trouble, investors should focus on companies that provide vital products. “Even when the economy is bad, people need to go to hospitals and take certain crucial drugs,” says Erin Xie, portfolio manager of BlackRock Health Sciences Opportunities Fund.

Invest in vital products

Xie recommends investing in Becton, Dickinson and Company, a maker of needles, syringes, IV catheters, and other essential equipment. Sales of the company have been increasing at an annual rate of 11%. “Becton, Dickinson can continue increasing its profit margins,” Xie says.

Xie also recommends Baxter International, which makes plasma products and other supplies used by hospitals. Xie says strong demand for plasma is helping to boost prices.

In past downturns, big pharmaceutical companies provided stability. Investors saw the companies as reliable growth stars. Lately, growth of the biggest companies has been slowing as patents expire on blockbuster drugs. Still, many of the large pharmaceutical companies have solid balance sheets and development pipelines that will eventually bring out new drugs.

One of the most resilient choices lately has been Johnson & Johnson. The giant health company has $14 billion in cash and is one of the handful of corporations that has won a AAA rating, the highest grade given by Standard & Poor's. Johnson & Johnson has increased its dividend annually for more than 50 years.

Analysts say that sales and earnings should continue growing this year. “Johnson & Johnson has been able to make acquisitions that will help to increase revenues,” says Paul Alan Davis, portfolio manager of Schwab Health Care Fund.

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