Investing in health care stocks is still a good bet

Editor’s Note: Peter Ricchiuti teaches courses in finance and investments at Tulane University’s Freeman School of Business. He blogs monthly about regional stocks for This is his most recent post:

When people are confused about an industry, it often creates an opportunity for investors, and there’s no industry people are more confused about right now than health care.

People were bewildered by the potential impact of the Affordable Care Act even before the recent Supreme Court arguments. Now, with a Supreme Court reversal of Obamacare a real possibility, people don’t want to touch health care stocks with a ten-foot pole.

While Obamacare may or may not be dead, reports of the death of the health care sector are, to paraphrase Mark Twain, grossly exaggerated.

To begin with, the fundamentals of the health care industry are simply phenomenal. In January, the oldest Baby Boomers turned 66, representing the first wave of 78 million prospective health care consumers. With or without the individual mandate, these consumers represent a tidal wave of business for health care companies for many years to come.

In addition to bright long-term prospects for the industry, many of the biggest health care companies are in fantastic financial shape. For example, Johnson & Johnson has $12 billion in cash; and Humana has $5 billion in their corporate coffers.

Why aren’t investors buying up health care stocks? In short, I think it comes down to uncertainty. Investors are unsure about which way health care reform will go, and if there’s one thing the market hates, it’s uncertainty. Regardless of how the Supreme Court ultimately decides, I think once a decision comes down — any decision — investors will feel more comfortable and return to health care stocks with enthusiasm.

Here at Burkenroad Reports, the student equities research program I manage at Tulane University, there are a couple of health care stocks we cover that I think are worth taking a look at. While it’s difficult to speculate on what effect a Supreme Court ruling might have on either, both may be good values now and can only benefit from the clarity a decision will bring.

The first is Cyberonics Inc., a Houston-based company that makes a medical device for the treatment of epilepsy. The tiny device, implanted in the shoulder of patients, delivers a pulse of electricity to the brain, and it’s been found to be remarkably effective for the treatment of refractory epilepsy. Patients need to exhaust other treatment methods first, but when they do, the device is fully covered by insurance. Cyberonics is profitable based solely on its current U.S. business, so as the company continues to expand its international presence, I think earnings will improve.

Another upside for Cyberonics is in an entirely different line of business: depression. Research has shown that the device also produces positive results for patients with treatment-resistant forms of depression. The FDA approved the device for the treatment of depression in 2005, but when it comes to medical devices and treatments, the question isn’t just, “Does it work?” It’s, “Will insurance pay for it?”

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Investing in health care stocks is still a good bet

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