The market is reaching all-time highs day after day, but some analysts are starting to get skeptical. A team of Goldman Sachs analysts led by Christian Mueller-Glissmann downgraded equities to underweight, pointing to macro issues all around the world.
What this means is that investors may need to be more discerning with their investments, looking carefully at different sectors and stocks. Several analysts have done just this and come to the conclusion that the health care sector is the place to be.
In a research note titled “Buy Healthcare, Sell Staples,” JPMorgan strategist Dubravko Lakos-Bujas focuses in on health care’s relative value versus other sectors, particularly non-discretionary consumer stocks like staple goods. “With staples trading at 22x on [next-12-month] PE, its valuation is even richer than [low volatility, momentum, quality, and growth stocks] and all sectors (especially with its defensive peer healthcare 16.5x),” comments Lakos-Bujas. “Historically, staples have traded at a discount given lower growth and weaker margins.”
It’s not like the world has changed either. The health care sector is expected to grow at a 6.4% pace over the next year, while staples are only projected to grow 3.8%. Health care also has a higher average dividend yield, at 4.3% versus 4.1% for staples. Moreover, the health care sector is only paying out 70% of its profits in dividends, while staples are paying out almost 100%.
Deutsche Bank also lists health care, along with tech and utilities as its preferred sectors. The bank notes that health care and tech stocks have been beating expectations so far this quarter. Another big health stock, CVS (CVS), reported on Tuesday and also beat on the bottom line while missing a bit on revenue. However, the revenue growth for CVS was still nearly 18% year-over-year, while its earnings per share growth was 8%. In contrast, the overall S&P 500’s earnings are expected to actually decrease by 5.5% in the second quarter.
Brad Loncar, the creator of a cancer immunotherapy Index (CNCR), believes that biotech is especially attractive in the health care sector. He points to growing demand in emerging markets for life saving drugs as a future catalyst. He also makes the distinction between “innovators,” which makes drug companies, and other companies, such as Valeant (VRX), that more often buy other biotech companies and simply raise prices. Loncar believes that the former is less exposed to regulation risk.
Loncar’s thesis is backed up by Lakos-Bujas, who notes that biotech companies have the highest margins in the health care sector, but the lowest PE (price per share divided by EPS).
Of course, the low valuations are explainable — rhetoric against the health care sector, particularly biotechs and drug makers, has been particularly brutal during this election cycle.
A Morgan Stanley report led by Ricky Goldwasser examines the potential impact of a Clinton and Trump presidency on the health care sector. Goldwasser believes that Clinton is the most likely to have a negative impact for drug makers, but will be beneficial for other health care sub-sectors, such as benefit facilities due to the likely expansion of federal health care programs. He also believes that vertical M&A (increasing vertical integration) in the health care sector is likely to increase during a Clinton presidency, in an attempt to cut costs.
On the other hand, Goldwasser does see some risk to health care services from a Trump presidency due to his intention to repeal Obamacare. But Goldawasser also believes it’ll be hard to actually repeal all aspects of it, politically speaking.
Trump has also commented on negotiating with drug companies for prices, but he has not been particularly focused on it so far. Morgan Stanley thinks health care could actually be a “relative outperformer” in a Trump presidency.
Rayhanul Ibrahim is a writer for Yahoo Finance.