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Health care, long an ailing stock market sector, has recovered over the past six months, with currently robust vital signs and strong growth projections.
The recovery comes after the sector failed to make good on positive expectations for 2022 based on estimates of pent-up demand for physician office visits and elective procedures after the pandemic.
Health care was basically flat in 2022 and again for most of 2023, a year when its overall performance was the third-worst among the market’s 11 sectors and the S&P 500 grew 26%.
Why this year may be different
Late in 2023 and in the first quarter of 2024, health-care stocks turned around, advancing about 5%, about half of the gain of the S&P 500. In mid-April, as the S&P 500 pulled back, the health-care sector gave up its first-quarter gains.
Yet, like the S&P 500, health care has gained since the market’s October low, catching some wind after two years of doldrums for the sector.
Several analysts are projecting strong performance for this year. BlackRock’s view is particularly sanguine: “Health care’s 12-month forward earnings growth is expected to lead all other sectors on a year-over-year basis.”
One factor driving investment is the broadening of market performance from big tech stocks into other sectors. Amid this perennial sector rotation, health-care stocks are a natural place for money to flow now because they’re defensive, having historically done well in slowing and growing economies alike.
This defensive advantage has been drawing investment from institutional investors expecting slowing economic growth at this late stage of the business cycle, as the Federal Reserve estimates growth of 2.5% for the first quarter compared with 3% in 2023.
Constant demand
Health care is a defensive redoubt for investors because demand isn’t affected by the economy. People will always need health care, and insured people will usually seek it, regardless of what the economy’s doing.
For many individuals, a slowing economy may lead to less job security, prompting them to spend less. This may mean putting off buying a new car or remodeling the kitchen, but not medical care.
Further, demand is unflagging from baby boomers on Medicare, including those with supplemental plans with relatively low deductibles and co-pays.
Also driving the sector has been a shift in investor sentiment, with buzz surrounding new pharmaceuticals, such as GLP-1 drugs for treating diabetes and effecting weight loss, and robotic technology enabling minimally invasive techniques for complex surgeries.
GLP-1 drugs have doubled Eli Lilly’s share price over the past 12 months, bringing its trailing price-earnings, or P/E, ratio for that period to a lofty 129. Over the same period, Intuitive Surgical’s robotic da Vinci Surgical System helped the company grow its stock 42%, bringing its trailing P/E ratio to 75.
Though these two stocks may continue to do well this year, health-care companies that probably have more room to grow, as indicated by their lower valuations, aren’t scarce. They can be found in various subsectors, including biotech, providers/services, equipment/supplies and life science tools/services.
Six stocks to watch
Here are six stocks with attractive valuations, low-risk fundamentals, good earnings and strong growth projections:
- Abbvie (ABBV). This well-known biotech company has an unusually high dividend yield — currently, 3.83%. Products include drugs for treating psoriatic arthritis, plaque psoriasis, Crohn’s disease, depression and some cancers. Market cap: $286 billion. Trailing 12-month P/E ratio: 16.3.
- Vertex Pharmaceuticals (VRTX). This biotech company is a dominant player in the market for cystic fibrosis therapies. After announcing largely positive results from a clinical trial of a non-opioid acute pain drug in January, the company said it would apply for regulatory approval at midyear. The goal is to capture some of the huge market share of opioids, which carry the risk of addiction. Market cap: about $102 billion. Trailing P/E: 28.
- Stryker Corp. (SYK). This medical device company manufactures various implants for spinal conditions and joint replacements for knees, hips and shoulders. Stryker benefits from sustained demand from aging boomers with deteriorating joints. Market cap: $129 billion. Trailing P/E: 33.
- Medpace Holdings (MEDP). At 43, Medpace’s trailing P/E may seem high, but the share price has risen 63% over the last six months. A contract research organization, Medpace provides client companies with expertise and services to help them shepherd new drugs and medical devices through the different phases of development. Market cap: $12 billion.
- Iqvia Holdings (IQV). This biotech company operates at the intersection of health care and technology, providing analytics, tech solutions and clinical research services to inform decision-making at hospitals and R&D organizations. P/E: 31. Market cap: $42 billion.
- Cencora (COR). Though Cencora’s share price has risen more than 27% over the last six months, earnings growth gives this provider of pharmaceutical supply-chain solutions and services for the human and animal markets a relatively low trailing P/E — 26. Market cap: $47 billion.
Since 1952, presidential election years have been consistently positive for the overall market, especially when an incumbent is running. But health-care stocks are sometimes an exception because the sector is a political punching bag for candidates pledging to cut costs for consumers. Stock prices may dip from such rhetoric, creating buying opportunities.
Current projections indicate that investors now buying shares of health-care companies with good fundamentals and strong market positions, and holding them into 2025, may be positioned for strong gains.
— By Dave Sheaff Gilreath, a certified financial planner, and partner/founder and chief investment officer at Sheaff Brock Investment Advisors and its institutional arm, Innovative Portfolios. Sheaff Brock Investment Advisors placed #10 in CNBC’s FA100 rankings.
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