With this column, we introduce David Pyrce, who manages Bear Creek Capital Partners II, L.P., a Southern California-based hedge fund specializing in all sectors of health care. He was once a health care equity analyst with Van Kasper & Co., a San Francisco-Based investment bank, and before that, held various management positions in the health care industry. As always, let us know what you think.

Mention health care investing, and you get two views on what to invest in: biotechnology or pharmaceutical stocks.

Which to choose is hard to figure out, especially when opinions on each subsector differ. Isn't fellow columnist

Lissa Morgenthaler

looking for a bottom in biotech in the next couple of weeks? And one day,

Don Luskin

was positive on

Abgenix

; the next day he didn't like

Geron

, and was thinking of shorting it.

There are equally diverse views on the pharmaceuticals: Doesn't

Jim Cramer

like

Merck

and

American Home Products

, and suggest selling biotech stocks? But then, hold on, I think I recall reading that

Gabe Hoffman

thinks Merck should be sold. Meanwhile,

Eli Lilly

and

Schering Plough

get hit with

FDA

warnings recently, and isn't

Aaron Task

questioning the defensive nature of the drug group?

Maybe I should just join

Gary B. Smith

, check out those new Titleist golf balls during a round of golf and look at the charts.

Spreading the Eggs Around

But despite the challenges, investing a portion of your portfolio in the consistently growing health care sector (more about that growth in part two) makes sense. And, if we have learned anything from the "tech wreck," it's not to put all of our eggs in one basket.

Health care represents a little less than 20% of

GDP, so it makes sense to put at least a portion of your investments in health care stocks. More important, diversify within health care by splitting your investment across the four primary health care segments: pharmaceuticals, biotechs, medical products and health care services.

If you think you're smart enough to pick the hot group, forget it, you're not: Those boring drug stocks, as represented by the

Amex Pharmaceutical Index,

or DRG, were up a whopping 164% from January 1996 to January 1999, while the

Amex Biotech Index,

or BTK, was up only 47%.

American Stock Exchange Biotechnology Index

But while the BTK soared 62% in 2000, it has fallen 36% from the highs reached last March. And maybe the drug stocks aren't so safe either: A number of blockbuster drugs are coming off patent soon. Won't that negatively impact drug stocks?

More Than Two Choices

Here comes what just might be a revelation to many: Health care investing does not need to be a schizophrenic dichotomy between just drug and biotech stocks. As I mentioned above, the health care sector is typically broken out in pharmaceuticals, biotechnology, health care services and medical products.

Just look at performance for the health care service group, as represented by the

Morgan Stanley Health Care Provider Index,

or RXH. This group includes stocks such as

Tenet Health Care

(THC) - Get Report

,

Lincare Holdings

(LNCR)

and

Healthsouth

(HRC) - Get Report

.

It was up an impressive 88% last year, with a one-year return from March 1, 2000, to March 1, 2001, of 109%. The medical products group, as represented by the

Morgan Stanley Health Care Products Index

, includes companies such as

Baxter International

(BAX) - Get Report

,

Cardinal Health

(CAH) - Get Report

and

Medtronic

(MDT) - Get Report

. They were up 30% last year, with a 21% return from March 1, 2000, to March 1, 2001.

Just imagine, making money investing in health care without a drug or biotech stock in sight, and you don't even have to worry about the differences between a fully humanized antibody, a murine antibody or a chimeric antibody. Good, solid performance out of boring, predictable health care stocks. Sexy? Not really. Exciting? Perhaps not. Profitable? Very likely.

Let's get down to specifics in Part 2.

David Pyrce manages Bear Creek Capital Partners II, L.P., Southern California-based hedge fund specializing in all sectors of healthcare. Prior to that, he was a healthcare equity analyst with Van Kasper & Company, a San Francisco-Based Investment Bank, and prior to that, held various management positions in the healthcare industry. At time of publication, Pyrce and/or Bear Creek was long Cardinal Health and Tenet Healthcare, although holdings can change at anytime. Under no circumstances does the information in this column represent are commendation to buy or sell stocks. Pyrce appreciates your feedback and invites you to send it to

davidpyrce@prodigy.net.