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Health Care Fund Loses 'Defensive' Quality

Eric Aanes, president of Titus Wealth Management, concurs with Yockey that valuations in the sector have improved. "Health care is a good defensive play," he said. "It has been long overdue and valuations are attractive in the sector."

Aanes prefers some of the large-cap pharmaceutical companies over health care providers, including Pfizer (PFE). "The stock has a good dividend yield that is now in excess of 7% and the company has a strong balance sheet," he said.

Aanes also likes drug manufacturer Teva Pharmaceutical Industries (TEVA). In late July, Teva reported second-quarter results that included a 3% increase in EPS on an 18% spike in net sales vs. a year earlier. The company benefited from new product launches in the U.S. and strong international sales growth.

Paul Alan Davis, a manager of the Schwab Health Care Fund (SWHFX), says that relative to other sectors, health care should be a safer area of the market at least until mid-2009. The manager, whose fund has fallen 30% this year, is underweight in managed-care companies. SWHFX has outperformed 92% of its peers over the past five years.

Two positions in the space that Davis has held on to are Aetna and Cigna (CI). "Their fundamentals are showing the ability to generate strong cash flows," he said. "Both companies are repurchasing shares and have done a good job with the timing of their repurchases."

The focus on fighting rising medical costs is a trend that has led to opportunities for Davis. Two of his top 25 holdings that also play a prominent role in IHF include Medco Health Solutions and Express Scripts (ESRX). "We are continuing to hold pharmacy benefit managers," he said. "Being involved in medical-cost containment, they are positioned for increased positive attention."

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