No one likes to be in last place, but that’s exactly how health care sector stocks stack up year to date. Out of the 10 S&P 500 sectors, health care is the worst performer through March 24, with a 6.5% decline. What's ailing the health care sector?
Pre-presidential election jitters could be triggering rotation out of this politically sensitive sector. Are first-quarter blues the start of a long, lingering illness for health care stocks, or could a quick recovery be around the corner? Let's take a look.
As presidential hopefuls battle for delegates across the country, the debate around the health care industry has been heating up. "Health care is one of the more politically influenced sectors. Regulations can change quickly, and a new administration could change the way things are done. Regulatory changes mean uncertainty, and the market doesn't like uncertainty," says JJ Kinahan, chief strategist at TD Ameritrade.
Politically Sensitive Sector
It's still early in the presidential nomination cycle, and the health care sector is potentially under fire from both sides of the political spectrum. "The Democrats want to control drug pricing, which is putting pressure on pharmaceuticals and biotech stocks. The Republicans keep saying they want to undo the Affordable Care Act [ACA], which would throw the health care sector into turmoil," says Sam Stovall, managing director at S&P Global Market Intelligence.
The nation's largest insurer, UnitedHealth (UNH), has warned publicly that it’s considering an exit from the ACA exchanges following a roughly $475 million loss on ACA-compliant plans in 2015.
"Investors are saying, let's wait until the smoke clears before we jump back into health care," says Stovall.
Here is a quick snapshot of the performance of some of the subsectors within the broader health care sector on a year-to-date basis:
|Health Care Sector ||-6.5%|
|Health Care Distributors||-12.9%|
|Health Care Equipment||-1.5%|
|Health Care Facilities||+6.7%|
|Health Care Services||-15.4%|
|Managed Health Care||+4.3%|
Data: Year-to-date through March 24. Source: S&P Capital IQ. For illustrative purposes only. Past performance does not guarantee future results.
Although the health care sector was battered early in the year, the fundamentals tell a different story. "The price/earnings ratio is much more attractive for health care versus the broader market. Health care is trading at a more than 10% discount to the S&P 500 based on 2016 projected earnings," Stovall says.
Second Quarter Shows Solid Seasonal Performance
Could health care be poised for a quick recovery? As the calendar sets to flip to the second quarter on Friday, the market is entering a seasonally bullish phase for health care, Stovall notes. Since 1990, the S&P 500 has churned out an average 2.2% gain during the second quarter, while the health care sector has been the best-performing sector over that period with a 3.5% increase. Even better: "While the S&P 500 is up 58% of the time in the second quarter since 1990, health care is up 69% of the time. Historically and seasonally, the second quarter has been a very positive quarter for health care," Stovall says.
Given the political uncertainty surrounding the health care sector, investors might try to be selective. "The overall sector is having a tough time, but there are always good stocks. You have to be very stock-specific in health care. Overall, it is an incredibly competitive space," Kinahan explains.
Investors need to do their homework and understand how companies make their money and how outside regulatory influences could impact them, Kinahan says. Within health care, "decide which subsectors you truly want to invest in and what you want to avoid," he says.
One way for TD Ameritrade clients to start searching through health care companies is by using a heat map, as shown in figure 1.
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