Health Care Industry Analysis ► (edit / improve)

Description: The health care industry depends on the care of health-related services by professionals for the benefit of patients. Medical device markers, insurance companies, pharmaceutical drug developers and government institutions are major participants in the treatment of sick, injured and disabled patients. Read More.

Profit Analysis: The best way to profit from health care stock investments is to find the most undervalued investments (Wall Street and Main Street buy ratings) during economic recessions. Those investments should be undervalued (see Wall Street on left side), and have high Main Street Common Sense investment ratings (see Main Street on right side). When an economic recovery occurs, different sectors of health care stocks will perform better or worse than the general stock market. Consumers generally maintain health care spending during recessions, but don't increase purchases during economic expansions. Eventually other stock investments become overvalued, because profits and stock prices increase past their fair values. During the last stages of an economic business cycle, just before a recession, it is best to buy health care stocks if you must invest in the stock market, because they are the least risky equity investments in a declining stock market. As investors search for safe (less risky) stock investments, they tend to buy health care stocks. Expensive (overvalued) stocks with low Main Street Common Sense ratings should be sold at any time to invest in better stocks. Two buys ratings are the best and two sell ratings are the worst possible stock investments.

Biotech stocks behave very differently from other health care stocks. Before drugs companies become profitable, they are constantly worried about their cash balance. For unprofitable biotechnology companies, the ability to raise cash is easiest during positive economic conditions, but difficult during recessions; the stock price rises and falls accordingly to the cash raising environment and drug pipeline potential. It is generally unwise to invest in biotechnology companies, because much of what drives the stock price is speculation about the drug pipeline, test results and government intervention. Unless the biotechnology is large and profitable and you have extensive industry experience (10 plus years), the only way to make a non-speculative investment in biotechnology is if you have insider information, which is illegal (see Martha Stewart). Warren Buffett does not own biotechnology companies for these specific reasons.

Trading Strategy: Health Care stocks tend to be less sensitive to economic changes. During economic recessions, consumers tend to decrease discretionary expenses to save money, but they can not decrease purchases of health care, because it is needed for everyday living. Spending on health care generally remains constant, because investors maintain their health care coverage, which helps health care stock prices. Health care insurance and related industries could decline during recessions, because unemployed workers decrease health care coverage, which decreases revenue to those stocks.

During economic recoveries, health care stock prices generally under perform the stock market, because revenue and profit growth is faster in companies, which declined the most during the proceeding recession. Health care insurance stock prices may increase as more employees receive health care benefits. During longer economic expansions, health care investments tend to growth at the same rate as the general stock market.

Government intervention is another important factor in health care investments, since government spending in health care is a very large portion of overall health care spending. When the government changes spending plans, different sub-sectors in the industry are significantly affected. To account for this added risk, Wikiwealth.com makes conservative assumptions about revenue, profits and risk.

Biotechnology companies are significantly impacted by specific drugs in their pipeline. If a drug passes different stages along the road to commercial use, then the drug company's stock price increases; the reverse is also true.

¹ WikiWealth only uses the largest 30 companies in each industry for the basis of these financial measures. Each statistic is the market weighted average of the 30 companies.

² Investment potential (margin of safety) is a weighted average of the discounted cash flow (DCF), the enterprise value (EV) market multiple, and the Warren Buffett investment methods.