Best Bets in Health Care

Last week, I shared some of my favorite health care stocks with you. Today, I want to go over some prominent health care stocks whose outlook doesn’t look so bright. Bear in mind the difference between a successful health care stock and an unsuccessful one can be huge.

From 1980 to 2000, both Merck (MRK) and Pfizer (PFE) have gained over 3,000%. But health care can also be tricky. Since 2000, both Merck and Pfizer have seen their stocks cut in half.

One former health care winner than I advice you to steer clear of is Medtronic (MDT). The company is a medical device firm, and its was great stock to own for many years. Over the last 30 years, shares of Medtronic rose over 130-fold! That’s enough to turn an $8,000 investment into over $1 million.

Lately, however, the company has been have a rough time. Medtronic became bloated and its heart defibrillators was no longer the shining star. Last month, the company lowered its long-term earnings growth forecast which wasn’t a surprise to me. On the plus side, the recent earnings report showed some improvement. I was also pleased to see the company making some strategic acquisitions. But Medtronic still has a long way to go. For now, I rate Medtronic a Hold.

Earlier I mentioned Merck’s outstanding performance prior to this decade–and I used to be a big fan. You could set your watch by Merck’s earnings results. Every quarter gave you another 15% to 20% earnings increase. Merck had great margins and its Return-On-Equity was the envy of Wall Street. But lately Merck has fallen on hard times. The Vioxx mess, where its anti-arthritis drug was blamed for increased heart attack risks, was a major sore spot, plus several of its top drugs have come off patent and that’s a big hit to the bottom line. My concern is that Merck is afraid of Pfizer’s recent merger with Wyeth and it too will try a major merger. The company has already dropped hints. A merger could be a big mistake. Executives love mergers but it rarely works out for shareholders. For now, Merck is a Hold.

A few weeks ago, Pfizer (PFE) stunned the investing world by announcing a major merger with Wyeth worth $68 billion. Wyeth used to be called American Home Products and its probably best-known for making Robitussin. Historically, Pfizer has liked to go for big mergers. In recent years, they bought Warner-Lambert and Pharmacia. Unfortunately, I don’t think either of those worked out well for shareholders. Still, Pfizer has an impressive stable of drugs including Lipitor, Celebrex and Viagra. For now, I rate Pfizer a Hold. If you already own, it’s not worth selling, but I wouldn’t add to your stake. Let’s see how the Wyeth merger goes.

Since health care reform was one of Barack Obama’s prime talking points during the election, there will certainly be some change coming in the next few years in this industry. That’s why I’m avoiding health care providers right now and will continue to do so throughout 2009. Democratic efforts to nationalize health care would certainly hurt these stocks by eating into their margins.

Some other health care stocks I’d avoid right now include Stryker (SYK), Zimmer (ZMH), PerkinElmer (PKI) and Intuitive Surgical (ISRG).

Remember, you can check out my opinion on over 5,000 stocks by visiting my Portfolio Grader website. The service is free to use so please use it as much as you like.

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