Ride the bailout wave

Avoid: Health-care I.T.
Buy: Big pharma

About $19 billion will be pumped into the health-care sector - stat - so that hospitals and clinics can replace paper medical records systems with electronic versions. Sounds great for health-care information technology firms like Cerner Corp. and McKesson. Trouble is, the hype surrounding this effort has already pushed those shares higher than other health-care stocks. What's more, Deutsche Bank analysts noted in a recent report that "any stimulus increases will only serve to offset the weakness seen from hospital capital expenditures."

If you're looking for an alternative health-care play, think Big Pharma. At first blush, that seems counterintuitive, if not risky. After all, President Obama has made it clear he aims to expand government's role in health care, which is likely to drive down prices that drugmakers can charge.

But many analysts feel pharma shares have been oversold on reform fears. J.P. Morgan analyst Chris Schott crunched the numbers on a worst-case scenario - involving, in part, sharply lower drug prices owing to Medicare reform. His conclusion: Even if that comes to pass, the sector is still attractively priced at eight times expected 2009 earnings. That's a 38% discount to the S&P. What's more, many drug-makers also sport large cash balances, which should enable them to maintain their above-average dividend yields.

How to invest: You can invest in a diversified mix of blue-chip drug companies - led by Johnson & Johnson, Pfizer, and Merck - through iShares Dow Jones U.S. Pharmaceuticals Index, a low-cost ETF.

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