Financial genius advices on: Investing in health #4

Even with the run-up in health care stocks in recent years, it's not too late for investors to add a dose of drugmakers, hospitals or related companies to their portfolios for 2016, experts say. But that's not to say there aren't pitfalls to watch out for. Here are five tips on health care investing from investing gurus. Look for fundamentals. In the health care sector and other industries, Brian Hennessey, a portfolio manager with Alpine Woods Capital Investors in Purchase, New York, looks for companies that have good secular earnings drivers, solid balance sheets and strong cash-flow generation that allow them to pay and grow dividends. Long-term contracts with customers and suppliers and solid management teams that can grow cash flows and dividends are good signs, he says. Hennessey likes pharmaceutical companies that have patent protection on drugs and biotech companies that have matured enough to essentially be pharmaceutical companies. In addition to hospitals, he likes drug-related services companies like Cardinal Health (ticker: CAH), McKesson Corp. (MCK) and AmerisourceBergen Corp. (ABC). He also likes pharmacy benefits managers like CVS Health Corp. (CVS). Go for funds. While individual stocks of large, diversified companies like Johnson & Johnson (JNJ), Merck & Co. (MRK) or Pfizer (PFE) are OK, the so-called "story stocks" and individual smaller biotech stocks are much riskier, says Steve Goldberg, partner with Tweddell Goldberg Investment Management in Silver Spring, Maryland. Not even the scientists at those companies, he says, know whether their drugs will make it through Food and Drug Administration trials. Instead, investors are better off in broad funds that are slightly more invested in health care than the broader market, he says. He likes the Vanguard Healthcare Fund Admiral Shares (VGHAX), the Vanguard Health Care exchange-traded fund (VHT) and Vanguard Dividend Growth Fund Investor Shares (VDIGX). Focus on the health care law. Companies that operate hospitals, such as HCA Holdings (HCA) and Universal Health Services (UHS), stand to benefit and be able to boost their dividends because of more insured patients coming through their systems and a reduced number of uninsured patients as a result of the Patient Protection and Affordable Care Act, Hennessey says.

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