Health care stocks aren't quite as ill as the rest of the stock market in 2008. People want to be well and live longer no matter what the state of the economy, so the demand for the majority of health care products and services continues unabated.

In the case of established drug, biopharmaceutical and medical-equipment companies holding enormous amounts of cash, they also aren't dependent on troubled debt markets.

Health and biotech funds are down 25 percent in value this year, according to Lipper Inc., compared with the average US stock fund that is down 37 percent.

"This has been a year when doing best means losing the least," said Kris Jenner, portfolio manager of the $2.1 billion T. Rowe Price Health Sciences Fund (PRHSX), down 26 percent this year after a 19 percent increase in 2007. "Large-cap biotech stocks have done by far the best for us, while managed care firms have dramatically underperformed and big pharmaceutical companies have been in a downturn for years."

Jenner, who holds a medical degree, especially admires the investment prospects of Teva Pharmaceutical Industries Ltd. (TEVA) as the "king of the hill" in generic drugs and Vertex Pharmaceuticals Inc. (VRTX) for its steps to bring to market a new class of hepatitis drugs. His current portfolio is 35 percent in biotech, 24 percent pharmaceuticals, 20 percent services and 15 percent products and devices, with the remainder in life sciences.

Dynamic performers within his diverse portfolio this year have included biopharmaceutical stocks Celgene Corp. (CELG), Genentech Inc. (DNA) and Amgen Inc. (AMGN), while medication-delivery and bioscience giant Baxter International Inc. (BAX) has held its own. Many other holdings haven't fared so well, though the real promise of health care stocks lies in the dramatically reduced stock prices of so many important companies.

"I would look for a bottoming turn in health care because no sector stays in a bear market forever," said Kelley Wright, managing editor of Investment Quality Trends Newsletter in Carlsbad, Calif. "We're seeing some pretty attractive dividend yields and also starting to see acquisitions."

Two positive signs that Wright sees among the big drug companies:

Pfizer Inc. (PFE) recently reported strong profits on flat revenues, and Bristol-Myers Squibb Co. (BMY) is effectively reinventing itself by embracing biotech.

Health care stocks have inherent political, regulatory, legal, clinical and reimbursement risks, which means that any bad news can quickly send them into a swoon.

As President-Elect Barack Obama prepares to take office on January 20, he has made it clear the economy is his top priority. Health care initiatives, though investors will monitor activity closely, seem destined for the back burner as the president and Congress deal with the financial crisis, the budget deficit and the war in Iraq.

"Before just about every potential change in party in Washington, the pharmaceuticals have been beaten like an old rug," said Wright. "Once campaigning and rhetoric is over, that stops and the stocks benefit from consumers willing to pay for treatments and therapies that help them feel better and live longer."

Though reform of health care has been vigorously debated since President Bill Clinton's first administration, Jenner said, the system remains imperfect and has escalating costs. Yet investors should be forewarned that any potential worrisome news will travel fast, adding volatility.

"The only drawback with the health care stocks and funds is that people will start ploughing money into them," said Tom Roseen, Lipper Inc. research manager for the US and Latin America. "Then, once they start turning the other way, they are likely to pop out of them."

Be judicious in what health care stocks you choose because there are so many kinds.

"Traditionally, the market has viewed health care stocks as defensive because the drivers of demand for these companies have tended to remain robust irrespective of economic cycles," said Chris Kallos, senior health care industry analyst with Zacks Investment Research. "However, while this has proven true for the most part in the past, the health care sector is not homogeneous and includes many different sub-industries."

Kallos recommends the beaten-down stocks of medical insurers WellPoint Inc. (WLP) and Humana Inc. (HUM) because both benefit from broad product offerings, geographic reach and low debt. Other choices are NovaMed Inc. (NOVA), an emerging company in ambulatory surgery centres and optical services to eye-care professionals, and dialysis services firm DaVita Inc. (DVA).