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Throw Back The Big Ones
CNBC.com | May 20, 2011 | 02:47 PM EDT

The health care sector is expanding as more individuals obtain health insurance yet the investment opportunities are shrinking — in market cap.

Expected government cuts to Medicare and Medicaid, the uncertainty of health care reform and looming patent expirations are weighing heavily on the outlook of the biggest companies in the sector: large-cap pharmaceutical stocks.

“Despite how cheap they look, you want to avoid a sector close to a patent cliff,’’ says Derek Taner, manager of the Invesco Global Health Care Fund , who has been underweight large drug makers for the last eight years.

But big pharma isn’t reflective of the overall sector, says Taner, “The rest of health care really isn’t that expensive, there is lot of opportunity elsewhere.’’

Invesco Global Health Care is finding opportunities among mid-cap and small cap companies where one to three key products are driving performance. Their size makes them easier to follow and their above-average growth rates make them attractive acquisition targets in a consolidating industry.

Taner tends to buy these stocks at a discount following negative news. Being a value manager in a traditional growth sector enables the fund to buy promising stocks earlier than growth managers, who tend to buy after earnings have rebounded.

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