With Congress advancing its controversial 1,900-page health care reform legislation, Wall Street has pushed health care sector stocks into value territory, according to Tyler Dann, co-manager of the $4.8 billion Aim Charter Fund CHTRX.
“We find opportunities in periods of controversy, and health care is the biggest area of controversy right now,” he said.
Health care stocks represent the largest overweighting in Mr. Dann's fund at 17%. Their weighting in the benchmark Russell 1000 Index is 13%.
Mr. Dunn argues that he's not just being contrarian and that there a strategic opportunity to seize on “growth/value anomalies.”
“There will continue to be opportunities in the health care sector as we come through the ashes and slouch toward a single-payer [health insurance] system,” he said. “Right now, many of those stocks are cheap because all but the worst-case scenario is priced in.”
Mr. Dann said that the market has oversold the sector out of fear that a public insurance option will be passed by Congress — which many think could eventually put private health insurance companies out of business.
“In my opinion, single-payer is the worst-case scenario for managed-care companies, but I don't think we'll reach that point for a long time, if ever, and our investment horizon is two or three years,” he said. “There is a valuation opportunity because of a generic fear over the prospect of any health care legislation.”
Mr. Dann summed up Wall Street's knee-jerk reaction to Congress' health care reform efforts as “legislation bad, sell stocks.”
“We think that attitude allows for a not-as-bad-as-you-think-it-is case scenario,” he said.
The flip side of the fears over a single-payer system is the idea that as more people are insured, the number of medical procedures performed should increase. This should create a volume opportunity for the health care industry, Mr. Dann said.
“We've been adding significantly to health care because we believe we're paid to buy fear and sell greed,” he added.
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