Health Care Stocks to Watch in 2010

NEW YORK (TheStreet) -- With a small-cap rally leading 2009 equity gains, conventional market wisdom dictates that large-cap companies in the health care sector should receive more attention in 2010.

Resolution to health care reform sholud also bring back those jittery investors who have remained on the healthcare sidelines.

The big pharmaceutical players have also been trading at pretty big price-to-earnings discounts versus the broad market -- a discount of approximately 34% to the S&P 500, according to health care consultant Leerink Swann.

Which brings up to Pfizer (PFE).

Research firms that are overweighing Pfizer, such as Leerink Swann, point to the "certainty of earnings" or "controlled earnings." Pfizer is still in the middle of its integration with Wyeth(WYEPR).

Pfizer has its p/e discount argument, too -- trading at nine times 2010 earnings, compared with the broad market's 17.5 times earnings ratio. Pfizer has never been a p/e leader, but has typically traded closer to the broad market. Pfizer bulls like Leerink Swann's head of health care research John Sullivan, say that cost controls, coupled with the p/e discount, make Pfizer shares attractive even given concerns over its future drug pipeline.

Still, a second opinion is always a good idea when it comes to heath care. Avik Roy, an analyst with Monness, Crespi & Hardt, said the structural problems for large pharmaceuticals firms are at heart of why their p/e ratios have been lower, and those questions have not been answered. So don't expect a big p/e boost in 2010, Roy argues.

"Pfizer can only move when all the big institutions bet on it, and that's driven by quality of pipeline relative to patent expirations," Roy explained. With powerhouse drug Lipitor going off patent, it is not clear what will drive future growth. Does cost-cutting post-merger lead to top line quality growth? Roy doesn't think so. "Certainty of earnings is fine, but the market won't reward cost-driven earnings with monster multiples; that's a dividend yield, deep-value play," Roy argues.

The most important question, then, may be this: While there could be little downside risk to Pfizer given its current valuation, is there much upside potential?