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Remain Cautious in Picking Healthcare Stocks

Despite the big rally some concerns still linger


Avoid These Red Herrings

On Tuesday, all eyes were on the healthcare sector, with investors piling into both biotechs and health insurers on some big news. As you can see from the heat map, the healthcare sector was overwhelmingly in the green.

Now, the reason that U.S. health insurers staged a really was that the government announced plans to ramp up Medicare spending. Payments to insurers under Medicare Advantage will increase by 3.3% in 2014. To put it into perspective, the original proposal called for cutting rates by 2.2%. So things are looking up for insurers like Aetna (NYSE:AET), Cigna (NYSE:CI), Health Net (NYSE:HNT), Humana (NYSE:HUM), Universal American (NYSE:UAM), UnitedHealth (NYSE:UNH), Wellcare Health Plans (NYSE:WCG) and WellPoint (NYSE:WLP).

But before you rush out to add shares of these stocks, consider this—most of these companies aren’t out of the water yet. In fact, with the exception of Cigna and Aetna, these are all D-rated companies right now. My Portfolio Grader screening tool has flagged these companies due to a combination of unfavorable risk to return ratios (Quantitative Grade) and lackluster balance sheet items (Fundamental Grade).

So those investors who pushed these stocks into the green may be seeing red before too long.

The fact is that we’re still not sure about how the 900-page Affordable Care Act will affect health insurance companies. We’ll likely have a better sense once we’re in the swing of first-quarter earnings season, but in the meantime I’m not willing to gamble on this—especially considering that several of these D-rated stocks are trading around 52-week highs. I’ve mentioned earlier that right now the chaff is rising along with the wheat, but once earnings come out, investors won’t hesitate to unload stocks that underperform.

So if you’re really looking to get into healthcare, you’ll want to check out what I have prepared for you. I mentioned earlier that several biotechs gapped up as well. Well, within biotechs, there’s a special class of companies that I believe will continue to rise even as liquidity thins out during the summer months. That’s because they operate in one of the fastest-growing industries in the country: Generic pharmaceuticals. I’ll have the full rundown on this $52 billion a year industry and my top picks soon.

Article printed from InvestorPlace Media,

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