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Why the politically fueled health care stock crash may be over for now

Brian Sozzi

Health care stocks are back in rally mode after being out of favor among investors this year.

The Health Care Select Sector SPDR Fund (^XLV) has rallied 6% in the past two weeks, points out Miller Tabak strategist Matt Maley. Top names in the space such as Pfizer, Cigna and UnitedHealth have each gained about 4% over this latest stretch. Maley says the momentum in health care reflects a view, at least in the short-term, that the April sell-off was overdone.

Fresh client flow data from Bank of America shows near-record inflows into health care stocks last week. Health care has seen the biggest outflows so far this year, BofA notes.

Strategists at the firm believe the health care sector has reached an “inflection point.”

The trading activity marks a sharp reversal of fortune from April and 2019.

The XLV dropped 2.5% in April, lagging the Dow Jones Industrial Average’s 1.8% gain. The S&P 500 notched a 2.5% increase in April.

On the year, the XLV is up a meager 3% — well behind the double-digit percentage gains for the benchmark indices.

Explaining the short-term rally isn’t too hard.

The space may have just gotten too cheap from a valuation perspective as various politicians — including President Donald Trump — took swipes at bloated drug prices and opaque business models at pharmaceutical benefit managers.

Also, not helping matters were fears — brought by those eyeing a run at Trump in 2020 —on potential new Medicare for all plans. Any plans along those lines could mean slimmer profit margins for many health care companies.

“If you believe (like we do) that ‘Medicare for all’ is not going to be something that comes close to fruition, this group is one that looks quite compelling right now,” Maley explains.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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