Thinking Of Investing In The Health Sector? Read This First!

Even with the massive run-up we’ve seen in medical stocks throughout 2016, it’s certainly not too late for investors to bring some pharmaceutical companies, hospitals, and other medical firms into their portfolio.

Health is one of those niches that never slows down, and has seen very few historical obstacles. Having said that, there are still various pitfalls which interested investors will have to be aware of. If you’re considering investing in medical stocks in the year ahead, here’s some advice for getting the most out of it.

Source: Public Domain Pictures

Look for Fundamentals

In the healthcare sector, along with various other industries, it’s always good practice to find companies that have solid balance sheets, healthy secular earnings drivers, and strong cash flow figures that will allow them to grow and pay dividends.

Long-term contracts with suppliers and customers, along with solid management teams, are also very good signs. When it comes to pharmaceutical firms and medical technology companies, it’s good to make sure they have patent protection on their drugs and other products.

Outside of hospitals, it’s also good to find drug-related service companies, such as McKesson Corp, or pharmacy benefits managers.

Target Funds

The individual stocks of large, diversified companies carry relatively little risk, and can be a very smart choice for people who are looking to take their first steps into the niche of medical investing.

On the other hand, so-called “story stocks”, and the stocks of smaller biotech stocks carry much more risk. In many cases, not even the most senior scientists at these companies will be able to tell you whether or not their drug will make it through the FDA’s approval process.

If you buy several stocks in these companies, and their drug gets turned around by the Food and Drug Administration process, then you could be waiting a long time to see any serious returns. Having said that, it’s always worth doing your research into the individual firms, and finding out the specific risks behind whatever it is they’re developing.

Certain niches, like genome engineering, are much more stable than over-the-counter sleep medication, for example. You can find details at Poseida Therapeutics.

Get Clued Up About the Law

Private businesses that run hospitals, for example Universal Health Services, are able to boost their profits and dividends by insured patients using their medical institutions and reduced uninsured patients since the Affordable Care Act was passed.

Before Obamacare, uninsured patients had been an expense, as people would come to hospitals with some kind of serious condition, couldn’t be turned away legally, and would occasionally fail to pay their bills.

With far more patients being insured today, more hospitals are able to get paid for their treatments, where they were formerly doing it essentially because they had to.

However, certain niches in the medical sector have become concerned with low pricing, which has been another big offshoot of Obamacare becoming a part of American healthcare.


Many cooperatives have scrambled for a market share by grinding down their prices for insurance plans. Some medical firms are so large and diversified that they have the luxury of not worrying about pricing changes until the law sees another considerable shift.

 Before you start drafting your plan for investing in the medical sector, it’s important to spend some time learning about how various types of firms can stand to benefit or lose out from pieces of legislation being passed. This will give you a little more foresight in times of political shifts, which is pretty relevant with Trump poised to get sworn in!

Look for Dividends

Source: Wikimedia

When you look at the big picture, paying dividends is a fairly new thing for private hospitals. In the past, most firms had been more focussed on growing through acquisitions. These days, most biotech companies still don’t pay dividends.

Having said that, some large biotech companies have developed and matured enough to essentially become pharmaceutical firms. Although they’re seeing a lot of rapid growth, many of these firms still have a lot of room for dividends.

When a new niche in the healthcare sector grows, it really grows, so it can often be hard to pin down stocks when they have the potential for a lot more growth. Having said that, a little foresight and research can go a long way, and open your eyes to stocks that will pay off massively in terms of dividends. Don’t let them slip through your fingers!

Keep Up with Politics

Closely tied to my point about the law, it’s also important to keep an eye on the political landscape when investing in the medical sector, both in the States and in countries where various healthcare companies are based.

Since Obama’s first term, the healthcare sector in the US has shifted gradually from a highly privatized market to a system that’s far more universal. This is set to see some back-peddling with Donald Trump as president, and four years down the line we could see a shift back towards a more nationalized, universal healthcare sector.

The point here is that you can’t be a successful healthcare investor while assuming that the regulatory landscape is going to stay exactly the same in the future. After the candidates were put forward, Hillary Clinton made several comments about high pharmaceutical costs and the damaging effects of healthcare mergers, yet was much more favorable towards Obamacare than the GOP.

Trump, on the other hand, has promised to dismantle it completely. Clinton probably wouldn’t have gone to such extremes, but had she won the election it would have been a big mistake for investors to assume that she’d leave it completely untouched.

When keeping up with the politics of healthcare, it’s important to distinguish what politicians say on the podium from what their policies would ultimately be.

If you were on the fence about investing in the medical sector, then I hope this post has helped to clear up various uncertainties you might have had. While there are certainly pitfalls that investors need to steer around, medical investing can be a very lucrative path to go down.