Updated from 3:40 p.m. ET

A J.P. Morgan analyst said Tuesday that health care is currently the most attractive sector in the market, and stocks in health care could make an average gain of 25% in 2009.

Thomas J. Lee upgraded the health care sector to Overweight from Neutral, saying the stocks are generally inexpensive compared with their expected earnings, and profit growth could exceed Wall Street expectations. Lee said pharmacy benefits managers, biotechnology companies and pharmaceutical companies are the most attractive areas of the industry.

Health care stocks are getting stronger but are not yet at their peak value, as consumer staple companies are, Lee wrote. He said shares of health care service companies are closer to a peak.

"Given the continued weak (economic) outlook, coupled with low visibility, health care is likely to continue outperforming," he said. The analyst also believes that health care is less vulnerable to economic weakness than many other industries.

Lee said there could be significant buyout activity in the sector in keeping with shareholder demand, and big drug companies may look to combine or buy smaller companies to fight off the revenue they will lose as patents on key products expire.

In just such a move, Eli Lilly ( LLY) bought cancer drug maker ImClone Systems for more than $6 billion in November, and some analysts are expecting similar deals to follow.

Lee said biotechnology stocks may make the largest gains, along with health care equipment and life science tools and services. He expects little stock movement from facility operators and suppliers.

The analyst assigned the highest scores to biotechnology companies including Alkermes ( ALKS), EnteroMedics ( ETRM), Volcano ( VOLC), Emergent Biosolutions ( EBS) and Gilead Sciences ( GILD)

His lowest scores went to research and development services company Charles River Laboratories International ( CRL), radiation equipment maker Accuray ( ARAY), medical device maker Kinetic Concepts ( KCI), PDL BioPharma ( PDLI) and testing systems maker Waters ( WAT).

With the markets moving lower in midday trading, Alkermes shares closed down 91 cents, or 8.4%, to $9.97, and Gilead Sciences shares lost $1.08 to $47.20. Shares of Charles River Labs fell 87 cents to $25.51, and stock in Accuray gave up 43 cents, or 8%, to $4.96. Trading volume was mostly light.

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