Health care mutual funds could help cure what ails you

— -- You've got the shivers and the shakes. Your ears are ringing, your head aches, and your left leg thumps when you rub your belly.

Hey, the stock market is making everyone sick these days, and Wall Street doesn't seem to have a cure. But a dose of health care stocks might help ease your pains.

Since June 30, though, the health care index has recovered nicely, gaining 7.6%, vs. virtually no change in the S&P 500.

Why the rally in health care? As a starting point, health care stocks are a traditional defensive play: No matter how sick the economy is, people still need lumbago treatments. Furthermore, many big pharmaceutical companies pay decent dividends, which have a palliative effect on stock-price pains. Merck, for example, has a 4.35% dividend yield; Pfizer pays 6.64%.

But drug companies had also been so beaten up on Wall Street that they started to look too cheap to pass up, "Investors just couldn't ignore them," says Samuel Isaly, manager of Eaton Vance Worldwide Health Sciences. For example, analysts expect Pfizer to earn $2.51 a share in 2009. At Thursday's closing price of $19.37 per share, Pfizer's price-to-future-earnings ratio is a bit under 8.

(The P-E ratio — a stock's price divided by its earnings per share — is a measure of how cheap or expensive a stock is, relative to its earnings. Lower is better: The S&P 500's P-E, based on 2009 operating earnings, is about 12.)

Investors weren't the only ones snapping up health care stocks. Health care companies were, too. In July, Roche offered $44 billion for Genentech, a giant biotechnology company. And Bristol-Myers Squibb offered $4.5 billion for ImClone, another big biotech firm, last month.