There are few sectors in the market you can count on during recessions. One of them happens to be health care. The difference with health care is that it’s less economy-sensitive; people generally cut back on other items before they do with drugs and other medical essentials.

That’s not to say that the stocks of health care companies don’t fall when times get tough – they drop with the best of them. But because of the “safe-haven” status they carry, they will likely drop less than the rest, and they stand to gain a good deal when good times return.

Recently, times have been tough. But for investors in health care, they’ve been better.

The health care industry is vast. It comprises two large bodies of industries that are only nominally related:

1. Health care equipment and services (including providers, manufacturers and distributors), and

2. Pharmaceuticals and Biotechnology.

Within these two realms lie nearly 1000 vastly divergent corporate entities with equally divergent capacities for earning money. As a very quick example, take a look at the following two relative strength charts.

The first shows the Dow Jones US Health Care Providers Index against the S&P 500 from the beginning of the year. The performance of the Providers as a group has been perfectly abysmal, dropping 15% more than the S&P 500 (yellow line; 29% on the year).

which is up 15% on the year and has bettered the S&P 500 over that time by over 30%!

Both sectors in the health care field – but vastly distant results.

Again, the comparison is useful only in drawing general conclusions. On the individual level there will be standouts in every sector. Health care providers New Concept Energy Inc. (AMEX:GBR) and Adcare Health Systems Inc. (AMEX:ADK), for example, are up 279.76% and 193.75% respectively year-to-date – exceptions in the health care provider field. And the biotech field has no shortage of big losers.

What’s an investor to do?

As a rule, we would steer investors interested in the health care industry away from health care providers, and particularly at this point, so soon before a presidential election. The provision of healthcare is too sensitive a business not to be meddled in by do-goody politicians who don’t believe in leaving free-markets alone. There’s just too much public pressure for legislative intervention in these businesses. That said, the pharmaceuticals could just as easily be picked on. Numerous analysts fear that price caps may be placed on certain medications should the elections fall squarely to the Democrats.

Perhaps simply picking a few of the best biotechs, or buying just one of the popular biotech ETFs would do the trick: SPDR Biotech ETF (XBI), PowerShares Dynamic Biotech & Genome (PBE), IShares NASDAQ Biotechnology (IBB), First Trust AMEX Biotechnology (FBT), or the Biotech HOLDRs (BBH).

We won’t address the relative merits of the ETFs at this time – just beware that there are significant differences between them, and you should deliberate carefully before choosing.

The wild card at this point is the great potential for takeovers in the sector. Until this year, the health care industry was so downtrodden and beaten up that it looked like life would never return. But with the rebound, many well-capitalized outfits are on the hunt for acquisitions. A couple of well-publicized takeovers by Roche and Bristol-Myers Squibb have recently helped to stoke the fires.

One More Health Care Option to Consider

There are yet other ways to play the health care advantage. Here’s one we like.

Working on the premise that when the bottom is in for the major stock averages (if it isn’t in already) we are going to experience a dramatic upside reversal, we expect the big name health care stocks to lead the entire group to new highs. How big is big?

BIG.

We are examining the field for the biggest market caps with the greatest relative strength showings and solid fundamentals. Look here:

The Dow Industrials offer only seven companies whose stock is in positive territory for the year. One, Johnson and Johnson, is in the health care field. In terms of size, J&J sits at the very top.

Within the pharmaceutical sub-index, J&J outperformed its peers by a broad 18% YTD. (see chart below), giving it a superior relative strength reading.

Moreover, the stock offers a dividend yield of 2.61% and can boast being the only American health care company with double digit earnings per share and revenue growth for the last 10 years. Johnson & Johnson also has a number of corporate bonds that trade briskly and offer the highest credit rating available – AAA.

Here’s how Johnson and Johnson stock fared over the last 25+ years. Note the recent jump above a former, longstanding line of resistance at $70. Very bullish.

How have you fared over the last 25 years?

Matt McAbby
Analyst, Oxbury Research