Healthcare gains, but faces some challenges to continued growth

While financial funds surprisingly came out on top for the third quarter, many analysts were startled that biotech and healthcare funds came in second, given the controversy about the fundamentals of companies, plus political questions about the "fairness" of consumer costs.

Can the twin sector repeat its gains for the fourth quarter and well into next year and beyond? Yes and no, say experts.

The long view "Biotechnology and healthcare are among the cutting edge" sectors of the new economy, says Ralph Acampora, chief technical analyst for Prudential Securities Inc. For long-term investors who want to invest with the future direction of the stock market, it is essential to have some position in the sector, he says.

The current view "We think it will be hard [for biotech and healthcare] to maintain their rapid growth" in the weeks ahead, says Dan Bandi, who heads value investing for the Armada group of funds.

Biotech, for example, requires massive amounts of new capital, Mr. Bandi notes. Thus, biotech firms are similar to many Internet-linked stocks, where actual earnings gains tend to be promised far down the investing highway, rather than immediately. "As reality sets in" about prospects for the group, the recent pell-mell gains will likely moderate, he says, leading to lower returns.

Healthcare stocks, meantime, are embroiled in political controversy, Bandi notes. "No matter who wins the White House," he says, "there will undoubtedly be changes" coming for the sector, which could lower profit margins.

Bandi does like urban-hospital stocks. But he notes that the two value funds he manages, the Armada Equity Income Trust (a large-cap value fund) and the Armada Small Cap Value Fund, both did especially well in the third quarter more through the contributions of other sectors - such as casualty insurance firms - than through the performance of biotech/healthcare companies.

Still, some analysts see continued, though moderating, gains in pharmaceuticals. Shannon Reid, who heads up the Evergreen Select Strategic Growth Fund, likes the ongoing solid - and predictable - double-digit earnings growth in pharmaceutical stocks. "They are good defensive plays," he says.

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