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Dodd, Dorgan, and Health-Care Stocks

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A political shake-up raises new questions on reform.

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With two veteran Senators calling it quits, pressure increases on Democrats to pass health-care reform sooner rather than later.

Connecticut's longtime Democratic Senator Christopher Dodd, who is also chairman of the Senate Banking Committee, announced today that he won't seek re-election this year. Senator Byron Dorgan of North Dakota, also a Democrat, said he's also checking out of the Beltway, announcing that he would retire after this year.

The stakes are high. The Wall Street Journal notes that "A series of retirements can often foreshadow a bad year for a party, and Democrats acknowledge that the struggling economy, a conservative backlash against Obama administration policies -- especially on health care -- and other factors make it likely they will lose seats."

This morning, strategists mulled over what these decisions by Dodd and Dorgan mean for health-care reform here in the US.

According to reports, President Barack Obama met with top House and Senate Democrats on Tuesday and told them to move quickly in settling differences between the health-care bills passed by each chamber late last year.

The Democrats are looking to nail down a unified bill for the President to sign before his State of the Union address later this month or in February.

Ed Yardeni of Yardeni Research, commenting on the decision of these politicians to check out, sees direct possible implications for health-care reform.

The investment strategist wrote to clients this morning: "Another bullish development is that key Congressional Democrats are retiring and changing parties. In other words, we don't have to wait until the November elections to declare that Gridlock may be the big winner!" Yardeni added that, "this could be really bad news for those convoluted health care plans making their way through Congress."

Les Funtleyder has a different take on the news. He's the health-care strategist at Miller Tabak and author of the book, Healthcare Investing: Profiting from the New World of Pharma, Biotech, and Health Care Services.

We called Funtleyder this morning to hear his opinion. He disagrees somewhat with Yardeni.

He argues that what the departures of Dodd and Dorgan really mean for health-care reform is that the pressure is now on for the Democrats to cram through the legislation -- quickly.

"They definitely now need to pass it this year or it won't happen next year," Funtleyder tells us. "Dodd gets replaced by a Democrat, but Dorgan on the other hand could get replaced by a Republican. So, next year, they will have 59 senators."

The strategist concludes, "I think that this increases the sense of urgency to get a deal done now, while they have the 60 votes and 218 votes in the Congress. If it doesn't succeed this go-round then it is near dead. They don't have the votes. It's just math. Without 60 votes in the Senate, health-care reform probably won't pass."

As for money-making investment opportunities, which subsectors within health care does Funtleyder now favor?

He's upbeat on managed care, for one. "Valuation, improving fundamentals and removal of reform overhang because, one way or another, reform overhang does get removed in a month or two," he says.

His top picks: Unitedhealth Group (UNH) and Humana (HUM).

Funtleyder says he also likes Big Pharma. There, he prefers Merck (MRK), Bristol-Myers Squibb (BMY), and Novartis (NVS) on weakness.

"The group tends to trade together so we would think the whole group does better next year and especially if the market gets weaker," he says. "If you don't have the time to dig underneath the surface then an ETF is a safe way to do it."

There are a few such ETFs investors can choose from, says Morningstar ETF analyst John Gabriel. His top choice, however, would be the iShares S&P Global Healthcare (IXJ).

"While not strictly a pharma ETF, the fund's exposure is heavily skewed towards the pharmaceuticals industry," says Gabriel, who also points out that about 35% of IXJ's assets are comprised of foreign firms so investors get exposure to international behemoths like Sanofi-Aventis (SNY) alongside their exposure to US-domiciled pharma companies such as Pfizer (PFE) and Abbott Laboratories (ABT).

A subsector where Funtleyder is less enthusiastic: large-cap biotech.

"The sector underperformed the market last year," he says. "The things that caused that to happen -- decelerating growth rates and a lack of new products -- are still in effect and we expect there will be underperformance in the large-cap biotech sector for the second year in a row."

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No positions in stocks mentioned.
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