Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Gregg Greenberg joined NBR on Tuesday (watch video and read transcript) to discuss the prognosis for health-care stocks in 2011.

Health-care stocks barely budged last year as concern over new legislation and a widespread preference for growth stocks left them out of the broader equity-market rally. But with the sector already outpacing the S&P 500 in 2011 -- racking up first-quarter returns of 6.3%, second only to energy stocks -- two fund managers believe this year will be different.

"Because the sector lagged in 2010, it sets itself up with some great risk/rewards," says Michael Liss, manager of the American Century Value Fund ( TWVLX). "The valuations are cheap, and we think the fear over the new health-care law is overblown. Put this all together, and we think they are going to have some movement in 2011 to reflect some better fundamentals."

Liss is bullish on Pfizer ( PFE), which he thinks will benefit from its acquisition of Wyeth.

"The Wyeth merger presents them with some great opportunities to take out some costs," Liss says. "Moreover, they have some interesting drugs in the pipeline. They have a drug for rheumatoid arthritis, which we think will get through its Phase III trials and get approved by the FDA. And they also have a lung cancer drug, which is another big opportunity."
Word on the Street

Liss is also hopeful that Johnson & Johnson ( JNJ) can rebound after a year plagued by recalls.

"The barriers are not insurmountable," he says. "It's a lot of blocking and tackling and simple execution. They should have had higher-quality control standards, and we are disappointed, obviously, as shareholders. But that presents the opportunity. And we think the free cash flow yield on this one is pretty good so the valuation is excellent. We are talking about an 8% or 9% cash flow yield on a very solid company."

Robert Zagunis, manager of the Jensen Fund ( JENSX), also sees some winners in the health-care sector, including Medtronic ( MDT), a medical device manufacturer he says was held up last year in part due to the economy.

"A lot of people would defer some of their elective surgeries up to a point because they were feeling poorer," Zagunis says. "Two things have happened since then. The economy has gotten better and the need for that operation has become more acute. So the use and need for those products have improved. And, at the same time, Medtronic is expanding internationally in a very good way."

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