A small dose of healthcare investment: Tom Valenzuela, president of Valenzuela Capital Partners in New York, shares his wisdom on buying stock in the healthcare sector - Healthcare & Well-being

Latino Leaders: The National Magazine of the Successful American Latino, April-May, 2003

Q. What is it that your company does exactly?

A. Valenzuela Capital Partners, LLC, was founded in 1989 and is registered at the Securities and Exchange Commission (SEC) as an investment advisor. The firm currently manages in excess of $1 billion for numerous institutional and retail clients. We have three investment products: large cap, mid cap, and small cap, which are all managed using a value-investment style. At Valenzuela Capital Partners, we have an investment team consisting of three portfolio managers and several senior analysts. In addition, the company started a mutual fund family named Amstar Asset Management, which offers a range of mutual fund investment products managed both by Valenzuela and other third-party managers. We believe that Amstar is the first mutual fund family founded by a Latino-owned company.

Q. What are healthcare stocks?

A. Broadly speaking, healthcare stocks are shares in any company that produces or sells goods that maintain or improve physical well-being. In addition, we can also include companies that provide services to maintain or improve one's physical well-being as healthcare stocks, too. But whether one is a professional stock market jockey or simply at home in bed with the flu, when we say healthcare stocks we tend to think of companies like Merck & Co., a drug-maker that produces the well-known cholesterol modifier Zocor; Johnson & Johnson, which makes a variety of products from bandaids to sutures; Walgreen, the ubiquitous drugstore; or Wellpoint, the HMO. There is also a high number of smaller or lesser known companies, such as Sunrise Assisted Living, a nursing home chain; Medtronic, which makes pacemakers; Universal Healthcare Services, which owns hospitals; and Owens & Minor, a company that warehouses and trucks mundane things like surgical gowns and gloves all over the country.

Q. Do healthcare stocks outperform other kinds of stocks in other sectors?

A. Yes, they have, but we have to wave a few large, very red flags strenuously. First the good news. In the United States, each and every household currently spends close to $20,000 per year on healthcare: visiting the doctor, filling a prescription of Claritin, or an aging parent's overnight stay in the hospital for an angiogram. These things can't be delayed or ignored for long. You can defer buying a car, a new home, or a new shirt, but if you have arthritis, high blood pressure, or a bad allergy, you take care of it right away. And the population is aging, and as we age we need more medical care. My 83-year-old mother sees her doctors (yes, plural) more than she sees me or her nieces and nephews. So, there is a steady and constant need for healthcare, which is good for companies in the healthcare business. Now the bad news for investors. Both the municipal, state, and federal agencies regulate, supervise, grant approvals to, and otherwise bedevil, vilify, and make life hell for healthcare companies. This is not a bad thing for us as consumers, but in the minds of professional investors such governmental issues are more dreaded than the bubonic plague. You see, we, allegedly professional investors, hate uncertainty whether it comes in the form of guessing how many fewer knives Williams-Sonoma will sell because a poor economy is affecting shoppers' paychecks or guessing what a legislator will allow Medicare to pay a doctor for a retiree's office visit. But the latter is a form of uncertainty that is particularly unappealing to investors.

Q. With such uncertainty, do you recommend healthcare stocks?

A. My colleagues and I are not strongly recommending healthcare stocks right now. Why? They have done relatively better than the stock market for the past three years and, unlike technology stocks, some are still well above where they sold three years ago. However, an angry backlash against ever-rising healthcare costs is gaining strength. The last time this happened was in the early 1990s, and stocks suffered considerably. Regulators are scrutinizing certain healthcare companies' business practices and accounting. In addition, the Bush administration is proposing revolutionary changes to Medicare, such as prescription drug benefits for seniors. But as a Rothschild ancestor said, "Buy to the sound of cannons and sell to the sound of trumpets." My personal sense, however, is that these struggles are not over yet, and until the federal government firmly begins to grapple with a Medicare prescription drug benefit in a way that is acceptable to Congress, healthcare stocks won't be transferred to the recovery room.

Q. Do yon invest your money in healthcare stocks?

A. I do invest my money in healthcare stocks. At the moment, I only own Merck & Co. (NYSE: MRK), which I have owned since the 1980s. Year in and year out, if you include dividends, Merck & Co. has gained about 9 percent each year since the 1980s. Drugmakers such as Lilly, Merck & Co., and Pfizer have never been cheaper. Everyone uses prescription drugs, and as we get older we use ever more drugs. I am always amazed at how many prescription drugs my middle-aged partners take (but then that may be related to the stock market's recent hemorrhaging).