I am a numbers person–especially when it comes to stock analysis. Every month, I fill up a spreadsheet with 1,000 stocks and 244 columns of data and formulas. I then turn my computer loose, and it goes wild performing two million calculations.

Why so many calculations?

I want the computer to tell me which companies have produced steady sales, earnings and dividend growth during the past 10 years. I also want to find companies that will continue to grow during the next year, two years, or even the next five years. In addition, I want to find companies that have strong balance sheets with little debt and lots of cash. And finally, I want my computer to tell me which stocks are undervalued and their appreciation potential.

Impossible? In a way, yes, but exploiting the capabilities of my computer is a good start to determine which companies deserve further study.

Lately, my computer is listing a lot of health care companies with very good potential. Several factors cause this phenomenon.

First, companies in the health care sector tend to be recession-resistant because people still need health care regardless of economic problems.

Second, there’s a huge swell in the number of people reaching age 65. During the next 25 years, because of aging baby boomers, the over-65 population will increase by 80%, creating a dramatic rise in the demand for health care.

Third, a lot of health care companies seem to be undervalued, which would cause them to appear on my list.  The low stock prices could be misleading, though, because health care reform could impact some of the companies in a very negative way.

Let’s look at how the health care industry is divided, so we can concentrate on the sectors with the most promise and the fewest problems.

Health care companies generally fall into one of four categories: biotechnology, pharmaceutical, medical equipment and medical services.

The biotechnology sector is made up of a few large companies, such as Amgen and many small companies such as Human Genome and United Therapeutics.  Biotech companies link biology and technology to produce biotechnology drugs using living micro-organisms, such as bacteria, yeast or cells, to enhance human life or the environment. A major component of biotech is the use of gene-splicing to produce new drugs.  Many companies in the biotech sector are small and their success depends entirely on the outcomes of their research efforts. Investment in smaller biotech companies carries high risk, although rewards can be huge.

Pharmaceutical companies create pharmaceutical drugs from chemicals and compounds derived from synthetic ingredients and plant extracts. Typically, pharmaceutical companies are really big companies that produce a lot of different drugs aimed at treating an array of illnesses and diseases. The largest companies in the pharmaceutical sector are Johnson & Johnson, Pfizer and Novartis.

Patent expirations are especially troubling for pharmaceutical companies. Less expensive generic drugs can be introduced as soon as a drug’s patent expires. In addition, the U.S. Food and Drug Administration usually issues exclusivity for shorter periods of time for pharmaceutical drugs than for biotechnology treatments. Companies with near-term patent expirations on major drugs include: Pfizer, Wyeth, Merck and Eli Lilly.

Pharmaceutical companies could be negatively impacted by proposed U.S. health care reform, as it will likely encourage less-costly generic drugs over brand-name drugs. The new plan could also lower reimbursements from Medicare, which would force lower drug prices–although lower reimbursements could be offset by the larger number of Americans with access to health insurance.

One bright spot for drug companies has emerged.  The U.S. Congress approved additional funding for the Food and Drug Administration, which enabled the FDA to hire 800 new employees in 2008.  Drug companies should now be able to get approvals for new drugs in a shorter period of time, which will allow companies to introduce drugs sooner and sell them for a longer period of time.

The third segment of the health care sector includes companies that make or distribute medical equipment. Equipment makers are experiencing increasing demand because of major technological advances such as less invasive surgery, robotics and computerized visual technology. The aging baby boom population will also increase the need for the use of medical equipment during the next 40 years!

Cutbacks in Medicare reimbursements should not become a problem for medical equipment makers. However, tighter controls by the FDA on products such as coronary artery stents will require companies to produce quality merchandise. Health care reform that includes coverage for more Americans will help more people to become eligible for medical procedures. The largest companies in the medical equipment sector include Alcon, Medtronic and Baxter.

The fourth segment of the health care sector is medical services, which encompasses companies in the managed care, hospital and clinical laboratory areas.  Companies such as Aetna and Humana are vulnerable to government reimbursement cuts. Private insurers oppose plans that encourage healthcare cooperatives because they do not want to compete against other programs modeled after Medicare or Medicaid. Hospitals have been successful in cutting costs during the last few years, but rising uncollectible charges are a problem. Health care reform will probably help hospitals.

The future of companies in the health care sector will be more certain when health care reform is enacted. If and when passed, health care reform could impact segments of the industry positively while impacting other parts negatively. The main goals of the Obama administration are to expand coverage, contain costs and avoid creating problems for any of the involved industries.  I generally favor medical equipment makers because they have the greatest potential with few problems.