Stocks look broadly expensive, but there are still good deals to be found in the health care sector.

The broad S&P 500 index trades at 21 times trailing earnings. Its historic average is less than 15 times earnings based on a far less generous method of calculating earnings than is commonly used today. Draw from that any of three conclusions: First, stocks are due for a tumble. Second, forecasts for 37% earnings growth this year are too cautious. Third, price/earnings ratios that seemed high in the past now appear normal because demand for stocks has shifted higher with the rise of 401(k)s and other automated investment plans as well as growing investor confidence in the ability of central bankers to steer around economic depressions.

Fortunately, investors can still find cheap shares with decent dividends. Health care stocks within the S&P 500 are just 14 times trailing earnings with relatively low expectations for earnings growth this year. Many of these stocks pay a percentage point or two more than the broad market s dividend yield of 1.9%.

Some of the discount for the health care sector seems warranted. The U.S. spends 16% of its gross domestic product on health care, including health plan premiums, out-of-pocket costs and government payments. The average for rich countries is 9% and the second-biggest spender, France, pays just 11%. Were the U.S. to reduce its health care bill to 11% of its GDP from 16%, the savings per family would top $7,000 per year. So whether America s health care system suffers from too much free enterprise or not enough of it, any serious plan to improve it will cut spending, which will reduce profits for many health care companies. That said, many health care stocks seem priced too pessimistically for even radical reform, to say nothing of the plodding, piecemeal improvements that seem more likely. Consider the three drug makers listed below.

Abbott Laboratories

Abbott Laboratories makes drugs, nutritional products, surgical devices, diagnostic instruments, and pet products. The roughly 120-year-old company is expected to increase its sales 8% this year to $33.1 billion. Earlier this month, Abbott won approval to launch Xience, a drug-releasing stent for arteries, in Japan, which is the second-largest market for such devices. The market is now dominated by Boston Scientific, Johnson & Johnson and Medtronic whose respective devices are named Taxus, Cypher and Endeavor. Phillip Nalbone, who covers Abbott shares for investment bank Wedbush, wrote in a Jan. 8 note to clients that the superior safety and efficacy profile of Xience will allow the Abbott platform to quickly gain market share from the entrenched players. Abbott shares have climbed about $2 to $56 and changesince the news, but at that price they still sell for 13times forecast 2010 earningsand carry a 2.9% dividend yield.

Novartis

Swiss giant Novartis makes drugs, both branded and generic, prescription and over-the-counter. It also makes vaccines, pet products and contact lenses. In past years, poor results from at least one unit dragged on the performance of the group. This year, all divisions are poised for at least mid-single-digit sales growth if we subtract 2009 s swine flu vaccine windfall, according to Jeffrey Holford, a stock analyst with Jefferies International. Shares are just 12 times forecast 2010 earnings and yield 3.3%.

Pfizer

A year ago Pfizer slashed its dividend payment in half in part to finance its $68 billion purchase of drug maker Wyeth. Investors will soon get their first look at what the deal will add to Pfizer s income statement. Wyeth results will be folded in with Pfizer s starting in the fourth quarter of 2009. Analysts foresee Pfizer increasing its sales by 37% this year but lifting its earnings per share by just 12%, suggesting the acquisition isn t yielding much in cost cuts for now. But shares sell for a scant nine times 2010 earnings and what s left of the dividend makes for a 3.7% yield.