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BY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY
For good reason New Jersey has been called the country's medicine cabinet. An impressive number of gigantic pharmaceutical companies are ensconced here, from Merck to Johnson & Johnson.
The reason? Well, a behavioral psychologist once wondered why Restaurant One attracted more customers than Restaurant Two. He figured: The very first diner-out chose one arbitrarily. The second potential customer, given a choice between a restaurant with no patrons and a restaurant with one, chose the more popular restaurant. From then on, most diners continued to choose the more popular restaurant – simply because the very first diner arbitrarily decided to go there. (Well, maybe the food, service, and ambiance in Restaurant One was actually better. And it was cheaper. Or it advertised more.)
Anyway, the fact that a few Big Pharma companies were already inhabiting New Jersey meant that there were employees suitable for other such companies, and all sorts of suppliers to help out. (Besides which, life in our fair state is darned good).
This brings me to today's topic: Why pharmaceutical and health-care stocks in general look like bargains.
Morningstar StockInvestor (August) speculates that "investors are still spooked by the heath-care reform legislation and uncertainty it provides...." But "the market's fears are overblown, providing a large number of opportunities in this area." In fact, when the newsletter looked at industries where stocks are cheap, it found that health care was No. 1.Money magazine (September) agrees, adding that another reason for the decline is that drug companies are losing patents on some of their blockbuster drugs. It also adds another reason for optimism: Drug companies have expanded into emerging markets, where spending on drugs is climbing.
Health-care stocks that the Morningstar newsletter gives its highest rating to: Johnson & Johnson, Novartis, Pfizer, Abbott Laboratories, Medtronic, Sanofi-Aventis, Stryker, and Zimmer Holdings.
Those that get four stars, for "above average": St. Joe, Amgen, Eli Lily & Company, GlaxoSmithKline, Merck, and St. Jude.
Ratings of average: AstraZeneca, Biogen Idec, Bristol-Myers Squibb, Genzyme, Novo Nordisk, Stericycle.
Below average: Allergen, Intuitive Surgical.
Not only do many of these stocks seem like bargains, but some were recently paying nice dividends: Novartis, 3.3%; JNJ, 3.6%; Pfizer, 4.4%; Abbott, 3.5%; BMY, 4.9%; Lily, 5.3%; Glaxo, 5.1%; Novartis, 3.3%; Sanofi, 3.6%.
As for Money magazine, its favorites are Abbott and Pfizer.
If you're not interested in buying individual stocks, which mutual fund might you consider? Morningstar Mutual Funds recommends (among no-load funds): T. Rowe Price Health Sciences and Vanguard Health Care. Another fund, Fidelity Select Medical Equipment & Systems, while not on Morningstar's choice list, does get its highest rating.
Load funds with high ratings: BlackRock Health Sciences Opportunities, Eaton Vance Worldwide Health Sciences A, and Prudential Jennison Health Sciences A.
The only health-care fund rated below average: Putnam Global Health Care A.
As for exchange-traded funds, there's Health Care Select Sector SPDR Fund (XLV) and iShares Dow Jones U.S. Healthcare Sector (IY).
Among closed-end funds, one that I myself own shares of is H&Q HealthCare (HQL). I also own an open-end heath-care fund (Vanguard's), along with Johnson & Johnson. And as it is, I think I have adequate exposure to health care.
Readers are invited to send financial questions to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
