Stock Investments in Healthcare - dummies

Stock Investments in Healthcare

By Paul Mladjenovic

Perhaps you’ve heard about the “graying of America.” This phrase obviously represents a firm megatrend in place. For stock investors, this megatrend is a purely demographic play, and the numbers are with them. The number of people over the age of 50, and especially those considered senior citizens, represents the fastest growing segment of American society.

The same megatrend is in place across the globe (especially in Europe). As more and more people move into this category, the idea that companies that serve this segment will also prosper becomes a no-brainer. Well-managed companies that run nursing homes and eldercare services will see their stocks rise.

Be careful about which healthcare firms you select because this sector includes stocks that are cyclical and also some that are defensive.

  • Cyclical: Companies that sell expensive equipment (such as CAT scans or MRI technology) may not do that well in an economic downturn because hospitals and other healthcare facilities may not want to upgrade or replace their equipment. Therefore, healthcare companies that sell big-ticket items can be considered cyclical.

  • Defensive: On the other hand, businesses that sell necessary items like medicine and bandages (such as pharmaceuticals and drug retailers) can be considered defensive. People who need medicine (such as aspirin or antacids) will buy it no matter how bad the economy is. In fact, people will probably buy even more aspirin and antacids in bad economic times.

Also be wary of political trends and government initiatives as they affect healthcare. In 2012, the Supreme Court substantially upheld the landmark healthcare legislation officially known as the Patient Protection and Affordable Care Act, and this means major changes for healthcare in 2013 and beyond. Whether this legislation remains intact still remains to be seen; a growing number of politicians are seeking to either discontinue it or get it modified.

Whatever occurs, it’s safe to say that healthcare will continue to be a major source of both concern and opportunity for investors. This is where your logic comes into play. Healthcare is a diverse sector; it will contain both winners and losers in the coming years. The U.S. may be slowly lurching toward socialized medicine. If this possibility develops, turn your bullish expectations into bearish ones.