Investing in Health Care Stocks

Health care stocks are ownership shares of companies that provide a broad range of medical services, equipment and pharmaceuticals. Health care stocks are different to bio-pharmaceuticals because they include a wider range of companies. The Health care industry is a very large employing millions of people and generating billions of dollars per year in revenue. Investing in health care can be in companies such as hospitals, ambulatory services, hospice care, medical diagnostics and medical treatment including physician services. A few health care companies are illustrated below:

Healthcare companies

Medtronic (MDT): Medtronic is a medical equipment company founded in 1949, with its headquarters in the State of Minnesota. The company distributes its medical devices worldwide. Medical areas in which this equipment is used include heart related disorders, diabetes and spinal applications among others. The company is quite old having been founded in 1949.

Universal Health Services Inc. (UHS): Universal Health Services Inc. is a hospital and acute care facility owner and manager. It's hospitals provide a wide array of health care services throughout much of the Eastern United States in addition to several other states including California, Texas Washington State and Nevada. This company was founded in 1978 and has appreciated in value considerably since then.

Merck (MRK): Merck & Co., Inc. is largely a health care pharmaceuticals company well known for its Viox drug that was recalled in September 2004 due to claims the drug increased the risk of heart attacks. Merck produces many other leading drugs that are used in the health care industry and is a global leader in drug research and manufacturing.

Benefits of healthcare stocks

The health care industry can be considered an inelastic industry. That is to say, due to the high level of specialization and strong demand, changes in prices within this industry are often not met with a decline in demand for medical services. For this reason, the health care industry can be considered to have significant pricing power which is to its advantage.

Another benefit of the owning stocks in the health care industry is the steady demand for health care services. Health care doesn't go out of style and often improvements in the industry spur new demand for specialized technologies domestically and internationally. U.S. Surgeons and various branches of U.S. Health Care are considered some of the best in the World and consequently also draw in revenue from international sources.

Disadvantages of healthcare stocks

There are also potential disadvantages to health care stocks. When health care becomes a political issue and talk of cutting Government support to health care or budgeting health care financing, this can affect the industry in a negative way. Just as government contracts may improve a companies stability, so can removal or redesigning health care financing.

Depending on which branch of health care one is investing in, each has its own particular risks. In the case of ambulatory services, gas prices may reduce profit margins; drug companies may experience bad results in clinical trials leading to a failed research project; hospital may experience heavier than normal emergency related expenses and so forth. When choosing health care stocks it is important to look into these types of details when ascertaining the profitability and performance of the company.

Key metrics

In addition to investigating companies' business operations, they can also be assessed using financial analysis techniques and measurements. A few such measurements that could be of use when determining financial performance of Health care stocks are as follows.

• Price/Sales Ratio: This ratio illustrates how many multiples a company's capital is in relation to its sales. For example, if Company Rx, a large health care services provider, has average capital investments of $64 billion and its annual sales are $12 billion 300 thousand. Its price/sales ratio would be $64billion/12.3 billion=5.2. This means the company's investment financing is over 5 times that of its annual sales. The closer to one this value is the better return a company is making on its invested capital.

• Basis Earning Power (BEP): Basic earning power is a percentage measure of profitability. The percent result is determined by dividing the value of a companies total assets by the value of the company's earnings before interest and tax. In the example of company Rx, their total assets are worth $19.512 billion and their earnings before interest in tax were $3.743 Billion. The resulting BEP outcome is $19.512/$3.743=5.21%. That is to say, the earnings before interest and tax are 5.21% of the total value of assets. Naturally, the higher BEP percentages are more advantageous for a company and its shareholders.