Advisers, analysts eye health care sector, awaiting the fate of Obama’s health plan

The death of longtime health care advocate Sen. Edward M. Kennedy, D-Mass. gave a new spark to those fighting for universal health care. But the fate of the current proposal on Capitol Hill is still very much in doubt and advisers and analysts are pondering the best way to place their bets.

Some version of health care reform legislation will pass this year, most believe, but many think the option of a federally sponsored health insurance plan will not make the final cut.

If that happens, stocks in the health care sector are offering good value for investors right now, according to Alex Morozov, health care equity analyst at Morningstar Inc. of Chicago.

“If you are a believer that the significant momentum for the plan has waned, and that the amount of negative publicity the option has generated and political resistance could potentially derail it, then health care stocks in pharmaceuticals, managed care and medical devices have attractive value,” he said.

Some of Morningstar’s five-star picks in managed-care stocks include UnitedHealth Group Inc. (UNH) of Minneapolis, with a sale price of $29 compared with its fair-value estimate of $48 and Wellpoint Inc. (WLP) of Indianapolis, with a stock price of $54.80, compared with a fair-value of $95.

Among pharmaceutical firms, Abbott Laboratories (ABT) of Abbott Park, Ill., is trading at $46 and has a fair value of $68.00 and Novartis AG (NVS) of Basel, Switzerland, is selling for $46 and has a fair value of $73, according to the firm, Mr. Morozov said.

A legislative traffic jam would be a boon for sector funds, according to Jim Lowell, the chief investment officer at Adviser Investments of Newton, Mass., which has $1 billion in assets under management.

“The fact that the health care debate entered into gridlock bodes well for health care stocks. The last thing you want is for the government to be able to set prices. Then they would be in control of the earnings growth rate of the companies you want to invest in.”

Mr. Lowell advises a 14% to 15% allocation to health care.

Others, not willing to place bets on the fate of health care reform, are adopting a wait-and-see strategy.

“The bill could have a tremendous negative or positive impact or it could be a non-event. So much is unknown,” said Mark Berg, president of Timothy Financial Counsel Inc., a fee-only advisory firm based in Wheaton, Ill.

He is also a member of the national board of directors of the Arlington Heights, Ill.-based National Association of Personal Financial Advisors.

Mr. Berg’s firm is advising clients to keep their health care allocations to 5% or less.

“Most investors get enough exposure from a Standard & Poor’s 500 [stock] index fund,” he said.

The 170 health care sector funds tracked by Morningstar posted an average return of 13.33% year-to-date through Aug. 26.