A shift is underway. Long ignored stocks in defensive sectors are perking up. Specifically, I’m seeing activity among health care issues. As a group, the sector is recovering from a period of underperformance and demonstrating relative strength vs. the broad market for the first time since last summer. Why the shift?
For one, there is an argument to be made that as the economic growth cycle and stock bull market matures, investors will start to transition from ultra-cyclical stocks like semiconductors into more defensive names.
There are other reasons too, including attractive valuations and high “sector idiosyncratic risk” — something I explain below. As all of this normalizes, there will be opportunities for those who can identify the best companies with the brightest growth prospects. Here are a few stocks that I think are good candidates.
But first, it’s worth noting the scale of healthcare’s recent underperformance. Since September 1, the S&P 500 has climbed more than 27%. Energy stocks have led the way, with the Energy SPDR (NYSE: XLE) up a whopping 51%. Poor ol’ Health Care SPDR (NYSE: XLV) has only managed a 17% increase.
It’s worth remembering that health care and biotechnology is poised to be one of the main engines of economic growth in the years to come as the baby boomers retire and start drawing their government Medicare benefits. Yes, there is a risk benefits will be slashed as Washington tries to get its fiscal house in order. Yet I believe the risk is low as politicians in both parties equally fear the wrath of the most powerful voting bloc around: Senior citizens.
To be sure, the price is right. According to Morgan Stanley equity strategist Adam Parker, health care stocks currently trade at the 26th percentile of its own price-to -forward earnings multiple. The group has also been trading in unison — rising and falling together — as investors looked to buy and sell the group en masse due to sector-wide catalysts like healthcare reform and changes to government drug payments.
Now that those risks are known and discounted, the strong will start to outperform the weak. So while the Health Care SPDR will give you easy access to the entire sector, I recommend screening for stocks in fresh uptrends with solid technical strength. Examples include Boston Scientific (NYSE: BSX), Baxter Intl. (BAX), Masimo Corp. (NASDAQ: MASI), Orthofix (NASDAQ: OFIX), and Ardea Biosciences (NASDAQ: RDEA). And for the gamblers out there, be sure to check out CytRx Corp. (NASDAQ: CYTR).
Disclosure: Anthony does not own or control a position in any of the companies or funds mentioned. He has recommended RDEA and BAX to his newsletter subscribers.
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