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How Will Health-Care Reform Impact These Funds?

Some great funds see attractive opportunities in the health-care sector.

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The U. S. House of Representatives just passed the health-care reform bill already passed by the Senate, along with a companion bill of changes that the Senate later approved. When President Obama signed the main bill into law, it put a cap on a long, contentious political fight over reforming the U.S. health-insurance system.

Health care is likely to remain a hot political issue for a while, but much of the uncertainty that has hung over the health-care sector for the past year is gone. That uncertainty was one of the factors that caused health-care stocks to underperform the market in 2009's rally. Once it became clear that the bill was likely to pass and the market saw more details, many health-care stocks rose modestly in a "relief rally."

Going forward, though, investors still need to evaluate what the reality of health-care reform means for individual stocks in the sector, not all of which will be affected in the same way. Earlier this week, Morningstar stock analysts Matthew Coffina (in this note) and Alex Morozov (in this video report) reviewed the new law's provisions and discussed what they may mean for various types of health-care stocks. Pharmaceutical and biotech companies are likely to be the biggest beneficiaries, as newly insured patients will be able to afford more drugs and biologics get stronger patent protection. Drugstores and medical distributors will likely also benefit from higher volume, but it looks like a more mixed bag for medical-device makers and health insurers. Even after the stocks' recent gains, health care looks like one of the cheapest sectors, with plenty of stocks trading well below Morningstar analysts' estimates of their fair values.

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David Kathman has a position in the following securities mentioned above: VPMCX. Find out about Morningstar’s editorial policies.