If Health-Care Stocks Look Promising, Take a Look at Biotech

Sometimes playing defense is your best offense -- especially this year. Chris Verrone of Strategas Research partners notes that 70 percent of health-care stocks have outperformed the S&P 500 over the past three months, the strongest of all ten industry groups in the index. Returns this year have been stellar.

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Health care is considered defensive because of its stable cash flow, as people need drugs and treatment regardless of economic cycles. Coupled with aging baby boomers and increased coverage under the U.S. health care law, macro trends certainly argue for buying into the industry. Still, the question facing investors is which group within the industry is most attractive. Health care broadly aggregates several types of companies:

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Pharmaceutical manufacturers like Pfizer and Bristol-Myers account for 41 percent of the index, because the gauge is based on market capitalization. However, if we look at what's growing fastest and generating this year's strongest returns, biotechnology wins hands down. Big pharma doesn't even make the year's top ten performers. Here's the score: biotechnology five, medical devices three, HMOs two.

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Focusing on biotech, you can buy the five separate stocks, or you can simply buy the biotech exchange-traded fund IBB. It's gained 48 percent this year and includes several dozen companies, including the five leaders.

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Blog readers will appreciate that IBB "shares outstanding" have increased 51 percent over the past two years, which is still about 20 percent below the peak in 2008. So for all the interest (and performance), investors are still holding back -- suggesting more money could enter the sector.

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