NEW YORK (TheStreet) -- Health stocks have been rallying. During the past year, the average health mutual fund returned 23.9%, while the S&P 500 gained 12.3%, according to Morningstar. Biotech stocks have been especially strong performers. With many companies winning drug approvals, Fidelity Select Biotechnology (FBIOX) returned 43.1% in the past year.
Can the health stocks remain market favorites? Probably. The outlook for sales and earnings is strong. If President Obama wins reelection, his signature health reform legislation will proceed, offering insurance coverage to 30 million people. That will provide new customers for hospitals and pharmaceutical companies.
If Gov. Romney wins, the implementation of Obamacare could slow. But chances are that the Republicans will not be able to stop the program altogether. Recent polls suggest that Democrats will maintain control of the Senate, giving them leverage to block efforts at repeal.
If you want to wager that the demand for pharmaceuticals and medical devices will remain strong, consider buying a health care mutual fund. But keep in mind that health care funds follow different strategies.
Some funds emphasize fast-growing biotech and drug companies, while other choices take a tamer approach, focusing on stable companies with slower growth and modest valuations. Funds in the growth camp include Alger Health Sciences (AHSAX), Eaton Vance Worldwide Health Sciences (ETHSX), and T. Rowe Price Health Sciences (PRHSX). Funds that focus on pharmaceutical giants and other stable choices include Live Oak Health Sciences (LOGSX), Schwab Health Care (SWHFX) and Vanguard Health Care (VGHCX). A solid choice in the growth camp is Eaton Vance Worldwide Health Sciences. During the past five years, the fund returned 6.1% annually, outpacing 68% of peers. Investors seeking a more mild-mannered fund should consider Live Oak Health Sciences, which returned 6.3% annually. While Eaton Vance and Live Oak have had similar returns, the managers of the two funds hold very different views. Sam Isaly, Eaton Vance's portfolio manager, argues that the future is bright for biotechnology companies.
Mark Oelschlager of Live Oak says that many of the strong performers are too expensive for his tastes. Instead, he is focusing on unloved device makers and pharmaceutical distributors. Seeking to find the best growth in the health sector, Isaly has 20% of his assets in biotechnology. He says that the biotechnology companies are proving to be powerful innovators, accounting for half of all new drug approvals in the U.S.
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