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Obamacare Boosts Health Sector

Stocks in this article: PFEJNJSHSAXGILDAETJFNAXCERNFSPHX

NEW YORK ( TheSTreet ) -- As Congress labored to pass Obamacare in 2009 and 2010, health stocks lagged the markets. Investors feared that the mammoth legislation would force health insurers to cover sick people, a process that would pinch profits. Pharmaceutical companies would be hurt by new fees that had been designed to cover the costs of the legislation. In addition, the complicated process created uncertainty, which unnerved investors and depressed even stocks that seemed likely to benefit as millions of consumers gained health insurance.

These days the picture looks brighter. With some of the uncertainty gone, health stocks have been climbing. During the past year, health funds returned 20.7%, outpacing the S&P 500 by 7 percentage points, according to Morningstar. Can the rally continue? Yes, say some mutual fund managers. They argue that Obamacare will provide a boost to some companies while inflicting only limited damage on insurers.

For years, health has been a growth sector. With demand for services increasing relentlessly, health funds returned 10.7% annually, during the past ten years, outpacing the S&P 500 by 2 percentage points. Health stocks were particularly appealing because they often showed defensive characteristics, outdoing the S&P in down markets. Obamacare will enable the health sector to continue performing much as it did in the past, says Eddie Yoon, portfolio manager of Fidelity Select Health Care (FSPHX). "As utilization of services continues increasing, this will still be a growth sector that is recession resistant," Yoon says.

Yoon cautions that some companies stand to gain more than others. He particularly likes medical software providers. As more consumers seek services, health costs will climb faster than analysts expect, he says. The inflation will lead hospitals and nursing homes to spend more heavily on software and technology that can help to control costs. "Right now hospitals don't have a clear picture of what their services really cost," Yoon says. "To become more efficient, they will have to buy software and build new kinds of infrastructure."

A leading health technology company that Fidelity has owned is Cerner (CERN). It helps hospitals install electronic patient records that reduce paperwork and enable doctors to coordinate care.

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