In no way do I feel the market has bottomed out or that the credit crisis has skidded to a halt, but in the words of Warren Buffett, “Be fearful when others are greedy and be greedy when others are fearful.” What does this mean for you, an investor? Invest in equities, now! In past articles I have noted that the Healthcare sector’s mistakenly being referred to as “recessionary proof” is quite a misconception; however, as a long-term investor (minimum three years), like an sa myself, you should be “greedy.” And what a perfect time it is to be greedy. Consumer confidence hit an all-time low of 38 in October, its lowest level since inception in 1967. An intelligent investor will act now.

It is time to restructure your personal portfolio, and you should look to the Healthcare sector for some growth and value. It can get a bit overwhelming when trying to find that right holding in each sub-sector in order to effectively diversify yourself and hedge against risk. You may ask yourself, should I put my hard-earned money into Pharmaceuticals, Biotech, Medical Device, Insurers, or Generics? I will touch upon all of these sub-sectors and answer your much needed questions. The stocks that I will discuss below will provide additional protection on the downside, and some will take your portfolio to new levels.

1. Gilead Sciences Inc. - Biotechnology

A few months ago I wrote an article about the concerns many investors had over Gilead (GILD) missing earnings in the 2nd Quarter. Well, my predictions were true that the concerns would not last too much longer. Analysts said, “Too much saturation in the market” and “Historical growth can’t continue.” So what happened in their most recent earnings? Gilead reported 3rd Quarter EPS of $0.55 versus analyst consensus of $0.52 EPS. Product sales increased 39% to a record of $1.34 billion primarily led by their “best in class” antiviral franchise. The largest contributors to the antiviral business were Truvada and Atripla, increasing 34% and 77% respectively for the quarter. In the past year or so, Gilead has intensified their marketing initiatives and has been able to effectively penetrate the European Union, which has been a main factor contributing to such a large hike in sales revenue. Huge news came in August when the FDA approved Viread for the treatment of chronic HBV in adults, and Gilead remains committed to working with physicians in an attempt to switch patients from similar but less effective therapies to Viread. Probably the most impressive aspect of Gilead, aside from their complete dominance in the HIV/AIDS market, is the superb fundamentals.  Return on Equity of 51.61%, Return on Assets of 30.01%, low Debt/Equity of 0.32, and a projected EPS Long-Term Growth Rate of 26.43%. As you can see by some of these numbers, Gilead will offer a great return on your investments and a huge upside as noted by the LT EPS growth rates through their continuous penetration of the United States and international markets.

• Market Cap: $43.20 Billion
• Trailing P/E: 24.55
• Forward P/E: 19.71
• ROA: 30.01%
• ROE: 51.61%
• Debt/Equity: 0.32
• LT EPS Growth Rate: 26.43%

2. Abbott Laboratories - Pharmaceuticals

By now you know that I am not a huge fan of pharmaceuticals, especially the large-caps; however, Abbott Laboratories (ABT) is definitely an exception. Abbott is strategically broken down into three major business segments depending on how you specifically dissect the firm.  Within the Medical Products segment are Abbott Vascular, Diagnostics, and Diabetes Care. Abbott is noted for its blockbuster drug, HUMIRA, which in the most recent quarter showed sales increasing 50% to $1.2 billion including 67% international growth. HUMIRA is primarily used for psoriasis, where it is quickly approaching 30% total market share, but is also approved for five other uses (rheumatoid arthritis, polyarticular juvenile idiopathic arthritis, psoriatic arthritis, ankylosing spondylitis, and Crohn’s disease). The company expects full year 2008 global sales for HUMIRA of more than $4.4 billion. The market for all HUMIRA indications is now estimated to exceed $20 billion by the year 2012. Abbott’s Diagnostics segment grew more than 15% in the most recent quarter led by strong growth in each of their three segments: core diagnostics, molecular diagnostics, and point of care diagnostics. I have always been a strong supporter of heavy R&D into diagnostics because I believe it is the future of healthcare. As we continue to face many difficulties with the FDA initiating additional warning labels on drugs due to adverse reactions, we must invest in personalized medicine, and that is exactly where diagnostics and ABT comes into play.

• Market Cap: $85.43 Billion
• Trailing P/E: 18.89
• Forward P/E: 14.96
• ROA: 11.46%
• ROE: 26.02%
• Debt/Equity: 0.55
• LT EPS Growth Rate: 12.00%
• Dividend Yield: 2.60%

3. Genentech Inc. - Biotechnology

You might wonder why I am presenting to you another biotech play when I wrote “5 Healthcare Stocks to Diversify your Portfolio.” Well, you should have exposure to two different areas in this sub-sector for growth reasons. Since you have Gilead to provide you with HIV/AIDS treatment, Genentech (DNA) has some of the best cancer drugs on the market. If you have followed even the least bit of healthcare news in the last year, you will have heard of Avastin, Genentech’s leading cancer drug. Avastin had sales in the U.S. of $704 million through the first nine months of this year.  Currently, it is approved for use against colon, lung, and breast cancer.  More importantly, DNA is awaiting FDA approval for the use of Avastin to treat Glioblastoma, or brain cancer.  Studies showed that with Avastin as a single agent in the Phase II trial, the cancer did not advance after six months in 43% of patients and 28% of patients saw tumors decrease in size by at least 50%, according to the company. On the flip-side, talks of a higher bid from Roche have penetrated the markets quite heavily since this past July. Roche bid for DNA at $89.00 per share and Genentech’s Board immediately shot it down, stating that it severely undervalued the company. Rightfully so, I believe. Avastin itself will bring in a couple billion per year in revenue (don’t forget their stellar pipeline as well). DNA has 21 drugs in Phase I, 12 drugs in Phase II, and 12 drugs in Phase III, and each drug has numerous uses. The pipeline, along with Avastin, further solidifies Roche’s need to increase their bid for the remaining 44.10% of DNA which it does not currently own.

• Market Cap: $85.84 Billion
• Trailing P/E: 27.85
• Forward P/E: 20.71
• ROA: 16.39%
• ROE: 25.90%
• Debt/Equity: 0.21
• LT EPS Growth Rate: 19.33%

4. Teva Pharmaceutical Industries Ltd. - Generics

Teva (TEVA) is the world’s largest generic drug maker, with revenues ahead of Sandoz (division of Novartis (NVS)) and Mylan (MYL) (which acquired Merck’s Generic division). Teva has operations in about 60 countries and continues to expand rapidly. Their main drug, Copaxone, continues to be the number one MS therapy in both the U.S. and international markets, reaching sales of $562 million in its most recent quarter. Shlomo Yanai, president and CEO of Teva, said, “This was a very good quarter for Teva. In the midst of these turbulent economic times, we experienced once again the benefits of our balanced business model…We entered into a new strategic partnership in Japan, the world’s second largest pharmaceutical market; closed our acquisition of Bentley in Spain; and secured the necessary financing for our acquisition of Barr Pharmaceuticals, a deal which we expect to close by the end of this year.” Even more importantly, as of October 28th, Teva had 145 products awaiting FDA approval, including 41 tentative approvals. The branded products of these applications had annual U.S. sales of over $96 billion. The global presence that Teva has is astounding, and smaller companies such as Mylan have gone out of their way in order to increase their global presence. None of the competitors has yet shown the strength required to stand up to Teva.

• Market Cap: $33.38 Billion
• Trailing P/E: 18.71
• Forward P/E: 14.12
• ROA: 8.90%
• ROE: 15.70%
• Debt/Equity: 0.31
• LT EPS Growth Rate: 15.36%
• Dividend Yield: 1.20%

5. Stryker Corporation - Medical Instruments & Supplies

Although Stryker (SYK) has shown some weakness in this current market, it offers great upside potential in the next few years given its current trading price and the favorable sub-sector trends. Stryker operates in two segments: MedSurg equipment and Orthopedic implant. MedSurg, which comprises 41% of total revenues, is made up of three different product categories: Instruments (18%), Endoscopy (14%) , and Medical (9%). The growth that Stryker has seen internationally within these product segments has been tremendous. Even with the recent strength of the U.S. Dollar, over the long-run these segments will be able to hold up. This fact is made more concrete when observing the new implementations made by the Fed and Treasury to increase liquidity in the markets and bail out countless firms. I tend to think that the Dollar will not hold up strongly in the long-run, and we can see the foreign exchange benefits that these multinational firms have experienced for quite some time. For Instruments, Endoscopy and Medical, international revenues grew at 18%, 35%, and 77% respectively in the most recent quarter. The Orthopedic implants segment represents 59% of sales and grew by 12% in the past quarter. When looking at the competitors for this division, Zimmer Holdings initially comes to mind. Stryker has more of the market share and a great diverse stream of new product launches in this area. Stryker has key developments within the spine, hips, knees, and trauma, all of which have great potential. Investors are worried that SYK might not be able to grow in the double digits during this recession; however, remember you are a long-term investor and when constructing a diversified portfolio SYK is a necessity.

• Market Cap: $18.00 Billion
• Trailing P/E: 16.24
• Forward P/E: 13.27
• ROA: 15.88%
• ROE: 21.02%
• Debt/Equity: 0.00
• LT EPS Growth Rate: 18.29%
• Dividend Yield: 0.70%

The five stocks mentioned above are in different sub-sectors and provide both growth and value. It is extremely difficult to pick only a certain amount of healthcare equities because there are some areas I was not able to mention. I feel confident in those segments mentioned above as they have shown and will continue to show resilience in turbulent times, as well as out-performance in a bull market.

-Ryan Savitz

Disclosure: The mutual fund that the author is associated with is long DNA, GILD, and SYK.