How to choose top healthcare stocks

In 2010, many healthcare stocks were undervalued.

But, at the same time, investors lacked a clear view of the fundamentals and growth prospects of businesses in the space, says Jean Hynes, senior vice president and portfolio manager at Wellington Management Company in Boston, Massachusetts. She manages the Renaissance Global Health Care Fund.

That changed after the introduction of the U.S. Affordable Care Act, she adds, since that Act changed the landscape for American healthcare suppliers, drug manufacturers and health insurers. As a result, there was a market correction in 2012 and 2013.

So, “as we stand in 2014, valuations in the [healthcare] sector are more fair,” says Hynes. “You don’t have a tremendous amount of valuation upside,” but there are still opportunities for your clients.

Read: Help clients dissect the healthcare sector

For example, “there was a question…about the role health insurance companies would play in the future,” she explains. But “we [now] believe insurance companies will…be the organizations that have power in the new [U.S. healthcare delivery] system.”

Hynes predicts U.S. insurers could be long-term outperformers since more Americans are getting insurance, and since insurers are benefitting from the increased use of Medicare—they account for 30% of the program.

Read: The world’s best healthcare is in…

Another reason the healthcare sector is growing is “we’re in a new era of biopharmaceutical research,” she says.

Overall, Hynes suggests the space is more of a stock picker’s market “where…all boats [won’t] rise at the same time. It [remains to be seen] which companies are going to outgrow the sector” based on the medicines and delivery models they develop in coming years.

Read: 3 reasons to invest in healthcare

So, you need to help clients figure out which companies will come out on top, she adds. Out of the hundreds that exist, identify “which ones are going to be the 10, 20 or 30 that will [offer] the most differentiated products and…valuation upsides. It’s going to be the companies that either have the right drugs that are not discounted [currently], or it’s going to be the service [and] device companies that have business models that will thrive.”

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